MG, via e-mail
Ray Boulger, technical manager at broker John Charcol, writes:
Most lenders have a maximum age of between 65 and 75 by when a new mortgage must be repaid. Those who took out a mortgage to a later age before the rules changed will not be forced to repay it early but may not be able to remortgage and so will have become a mortgage prisoner of their current lender.
There is no logic in imposing such a maximum age, especially now we know that (a) the government will be abolishing a mandatory retirement age next year and (b) the timescale for increasing the minimum age at which the state pension can be taken is being accelerated.
One of the reasons lenders have reduced the maximum age is that with limited funds available as a result of the credit crunch they have looked for areas where they can restrict lending but another important reason is pressure from the Financial Services Authority. The FSA has pressurised lenders not to lend into retirement because it considers it more risky, but it appears to have either overlooked, or chosen to ignore, the forthcoming changes in retirement legislation. It also overlooks the fact that pension income can be more secure than earned income and may also be index-linked.
I would still generally advise people to plan to repay their mortgage by the time they expect to retire but as retirement age will be flexible after next year's expected change in the law it is inappropriate for the FSA or lenders to assume that age will be 65. Most people taking out mortgages today will not be able to draw their state pension until later than age 65.
Some will reach whatever age they decide to retire with a small amount of their mortgage outstanding, perhaps as a result of their endowment or ISA under-performing. They may find it easier to afford an interest-only mortgage after retirement than to find a lump sum to pay off the remaining mortgage. Others who have sufficient income to afford it may want an interest-only mortgage after retirement for reasons such as helping a family member with a deposit to buy a property or IHT planning.
Maybe the government frowns on this because some ministers lump together legal tax avoidance with tax evasion, which is illegal.