Mortgage misery for retired homeowners

Retired homeowners with home loans still to pay off are struggling to secure remortgage deals as age limits are tightened and repayment plans come under greater scrutiny.

First-time buyers with small deposits have borne the brunt of tightened mortgage criteria over the last four years as lenders have sought to minimise risks. But evidence suggests borrowers at the opposite end of the age spectrum are now finding lenders less accommodating when it comes to extending terms, remortgaging or moving home.

The Financial Ombudsman Service (FOS) has reported a marked rise over the last year in complaints from retired borrowers regarding lenders lowering their upper age limit on mortgages.

There were also disputes over lenders demanding to see proof of a borrower’s income in retirement and wanting more evidence showing how people would repay their mortgage after they retired.

With people working longer and increasingly likely to take their debts into retirement, such issues are likely to be a sign of things to come.

More than half of borrowers over the age of 50 have mortgages they will still be paying off beyond 65, according to the Financial Services Authority (FSA). Its research found that almost two-thirds of over-50s are planning on borrowing into their retirement.

The City regulator has called on lenders to take a more “robust” approach to borrowers approaching retirement – and as more older borrowers are finding out, it seems the industry has listened.

“During the last six months lenders have been drawing their horns in ahead of the FSA’s mortgage market review (MMR) reforms,” said Andrew Hagger, head of communications at Moneynet.

“One of the consequences is that lenders have become more focused on affordability, hence the number of banks adopting a more cautious approach to interest- only lending and the provision of mortgage finance to older borrowers, unless they can satisfy more stringent acceptance criteria.”

A recent clampdown on interest-only mortgages poses perhaps the biggest single problem for older borrowers.

Several lenders have pulled out of the interest-only market entirely and most major banks and building societies have reduced to 50 per cent the maximum loan-to-value (LTV) they will consider for the mortgages.

Borrowers nearing retirement but without solid repayment plans in place – and property sale proceeds are no longer considered viable repayment strategies – are set to pay the price, Many are set to become mortgage prisoners unable to move off their lender’s standard variable rate (SVR).

Up to eight in ten borrowers with interest-only mortgages set to mature over the next decade have no adequate repayment strategy, said the FSA, among them tens of thousands of people either in retirement or close to it.

“The crackdown on interest-only mortgages could present real problems for borrowers in their late 50s or 60s with an interest-only mortgage,” warned David Black, head of banking at Defaqto.

“It makes it very difficult to remortgage because of the massive uplift in mortgage costs to convert to a capital repayment basis and this is further exacerbated by having a short mortgage term. Clearly this is far worse for those that have no viable repayment vehicle in place or a massive shortfall in it.”

The problems for those with loans still to pay off in their 60s and 70s extend beyond interest-only mortgages, however.

Lenders continue to take a stringent line regarding age limits, despite pressure to be more flexible after the scrapping of the default retirement age last year.

Age limits do vary and the majority of lenders specify a maximum age of 75 by the end of the term.

However, the overarching assumption among lenders is that the mortgage will be paid off by the time the borrower is 65, posing a problem for the growing number of people reaching retirement with outstanding loans.

That has been a source of dissatisfaction among retired borrowers, as the FOS revealed, yet lenders have an obligation to ensure the mortgage can be supported in retirement.

The FSA’s policy on lending into retirement states that lenders must verify all the income used to cover the mortgage and assess the detail of the retirement income where the term extends significantly into retirement.

Last year the FSA fined DB Mortgages £840,000 for irresponsible lending practices that included a failure to ensure borrowers could continue to repay their loan once retired.

The regulator said DB had checked retirement income five years before borrowers reached their pension age, which it felt was insufficiently far in advance.

Other lenders are responding to that judgment by taking an increasingly risk-averse approach to borrowers at or nearing retirement, says to the Council of Mortgage Lenders.

And that spells more pressure on borrowers in their 60s to prove they can keep repaying their loan.

In some cases that means banks and building societies are limiting lending to retired homeowners wherever they can, leaving many with a stiff task when it comes to securing a decent remortgage deal.

Black said: “Lenders may do checks to assess the plausibility of applicants’ anticipated or selected age of retirement and may require further information or evidence to support it. If a mortgage is likely to be taken into retirement then lenders may want to see evidence of enough income in retirement.”

Ultimately, a combination of the interest-only restrictions, lower age limits of mortgages and stricter income verifications could leave some older homeowners struggling to find new deals and relying on the goodwill of lenders, warned Mark Dyason, of Edinburgh Mortgage Advice.

“Each of the above leaves older borrowers heading towards a place where they are dependent on the current lenders forbearance to keep their properties and this will be very upsetting.”