Cash Clinic
Older borrowers
Are lenders failing to keep up?
We’re all living longer and many of us will have to work extra years, and take our pensions later, to accommodate rising life expectancy. But unfortunately for those looking to move up or even get on to the property ladder later in life, most mortgage lenders are failing to keep up.

From October this year, new anti-age discrimination laws now force employers to treat workers wanting to work longer more favourably and the state pension age is set to rise eventually to 68. However, many individuals will still be turned down for a mortgage to run beyond the age of 65.

According to the Prudential, a massive 40 per cent of people over 55 who are approaching retirement want to carry on working after 65. Also, a recent Chartered Institute of Personnel Development study showed that 31 per cent of firms are recruiting people above state pension age.

A good proportion of older workers could therefore support a mortgage. However, most mortgage companies have a maximum age beyond which they refuse to lend. This is normally 65 for employees and 70, or occasionally 75, for the self-employed. Someone taking out a repayment mortgage in their 40s or 50s may be forced into a shorter loan term as a result, which could drastically limit what they could afford to buy.

Since the Financial Services Authority started regulating mortgages in 2004, some lenders have become stricter, requiring documentary proof that older borrowers can afford repayment mortgages.

However, banks will almost certainly agree to mortgage terms continuing into retirement if you can demonstrate that you will be capable of making repayments out of pension income.

If you have a final salary pension you are likely to find it easier to secure mortgage borrowing into retirement. Money purchase or personal pension savers will generally find they have fewer options available to them.

All is not lost, however, for borrowers in their 40s and 50s with poorer pension plans. If you can demonstrate to a lender that there will be some other means to repay the outstanding debt by the age of 65, they’ll probably let you have an interest-only or part interest-only mortgage over the shorter term. So if you plan to eject your kids by that age, and downsize to a cheaper home, you could pay off the outstanding sum with the left-over capital.

Alternatively, you may have investments – such as endowments, or PEPs and ISAs – which could be used to reduce the debt. Or you could also use your tax-free cash entitlement from your pension.
Borrowers who have repaid most of the capital by retirement age, and have just, say, £50,000 outstanding, might be able to convince the lender that this is supportable out of pension income.

There’s always the possibility of converting the debt into an equity release or lifetime mortgage – although rolling up interest charges would eat into your equity.

If you would like to find out more, please email or contact us for further information.

Levels and bases of, and reliefs from, taxation are subject to change.
Quote source: Financial Times Media 18.08.06