Older borrowers locked out of mortgage market by lenders

The difficulty facing older borrowers is particularly acute for the large number with interest-only mortgages, which very few lenders now offer.

The predicament for many is made worse by the squeeze on household finances, with pensioners hit particularly hard by the decline in savings income. The average retiree owes more than £31,000 in mortgage, loan, credit card and overdraft debts, according to recent research by Prudential.

Mortgages are increasingly the greatest area of concern. Since 2009, there has been a 44 per cent rise in the number of over-60s calling the StepChange charity – formerly the Consumer Credit Counselling Service – about difficulties  repaying mortgages.

More than half of borrowers over 50 will still be clearing their mortgages past the age of 65, Financial Services Authority (FSA) data shows. It also revealed last year that eight in ten borrowers with interest-only loans maturing over the next decade have no repayment plan and risk being lumbered with mortgage debts throughout retirement.

However, the options for older borrowers have narrowed gradually as the mortgage market has contracted over the past four years. Lenders backed further away from retired borrowers when the FSA published its mortgage market review in October.

While there were no rules specifically governing lending to retirees, it did contain new affordability guidelines that have made it riskier for lenders to advance mortgages to older age groups.

Graeme Leckie, financial adviser at Kelvin Financial Planning, said: “Lending to over-65s is deemed as high-risk lending by the regulator. Lenders are limited to their exposure of these markets by the FSA, and most banks and building societies want to avoid its glare.

“Obtaining a mortgage has now become extremely difficult for those aged over 65.”

Consequently, many retirees find their options severely restricted when their existing mortgages come to an end,  especially those on interest-only deals.

Over-80s are particularly out in the cold as far as lenders are concerned, with the maximum lending age limit now between 70 and 75.

Just one lender in Scotland will offer loans to people over 80, and that is only because of the Scottish Building Society’s return to the market last week. It relaunched its retirement home plan, basically an interest-only mortgage where the debt is repaid by the estate, although Leckie believes the terms are less attractive than they were previously.

But borrowers in Scotland do have access to some useful products from south of the Border, said Alison Mitchell, mortgage expert at Edinburgh IFA Robson Macintosh.

“The new tighter affordability rules are restricting the loan size, but there are other options available for those over-65s that find themselves requiring loans. Lenders find it hard to discriminate on age alone, and older borrowers will be able to find a solution out there.”

She pointed to Leeds Building Society’s retirement mortgage, available to age 80 on either a capital and interest or an interest-only basis.

“This product offers a way forward for those retired borrowers wanting a mortgage for a finite period of time. The interest charged on this product is slightly higher than that offered to your younger borrower, but still very competitive,” she said.

The product is available in Scotland if the loan is for a house purchase or the borrower is remortgaging from another lender.

Mitchell believes the picture is brighter than it first appears for older borrowers, provided they can meet the stricter affordability criteria.

“Many of the high-street lenders are open for business for our more mature borrower with the same rate across the board, especially those that have come to the end of their mortgage term and still have loans to pay,” she said.

For many older borrowers, however, equity release is now the only route open. The good news is that while they can still be risky, lifetime mortgages – where a loan is taken out against the home as either a lump sum, regular payments or a combination of the two – are becoming increasingly viable.

A lifetime mortgage where the interest is paid monthly can be a suitable option for those with no other means of clearing their mortgage, according to Mitchell.

“This means that the client hasn’t got to concern themselves with looking for a new deal all the time and knows  exactly what debt will be left on their death,” she said.

“The amount they can borrow depends on their age and, although not for everyone, would be worth considering in many cases.”

Equity release specialist Stonehaven is among a tiny handful of firms offering borrowers in Scotland the option of paying the interest monthly.

That may soon change, however. “The market is getting more competitive each year as this type of product has come back in favour, helping these interest-only clients with no means to clear the loan, or parents helping children,” said Mitchell.

But with pensioners finding it harder to secure a loan at all, both Leckie and Mitchell strongly suggest investing in financial advice.

“In this day and age, borrowers need to look for help,” said Mitchell. “There are products that are very competitive and affordable, allowing the mortgage to run to age 80 but, as usual, enlisting the knowledge of a financial adviser would  always be recommended. This would ensure the right product is found and the right price is chosen.”

Twitter: @VaughanSalway