Mortgages for life: but will it impact on pension flexibility?

The decision by Halifax to move its upper age limit for mortgages to 80, followed by Nationwide upping the ante to 85, has caused a ripple in the financial press – but is it that surprising? Moreover, does it come with a hidden cost?

While some lenders have stolidly sat on their hands in the face of the UK’s changing demographic (RBS and Barclays, for instance, still think being 70 makes you too old to pay your bills), sharper operators are recognising the reality that many of us not only can maintain payments into retirement, but that it makes a lot of sense for them to go down this route.

Those lenders prepared to push the envelope will find plenty of takers. Many people are retiring with cards and loans around their neck, paying interest rates in the high 20%s: given the opportunity, why not convert that to a bargain basement rate of interest, safe in the knowledge that there’s plenty of equity on your side?

Some of these borrowers may well be helping their children or grandchildren onto the housing ladder. Again, it makes sense to trickle the money down the generations when it’s most needed, rather than wait until they die.

Into the future, it seems possible that many people in their 40s and beyond will be looking well beyond the 30 year timeframe to buy a home. Once more, mortgages stretching into the far distance are a logical solution.

The fly in the ointment is that lenders are still going to be sticklers about your ability to repay, and Halifax and Nationwide follow the trend in wanting borrowers to prove their retirement income before they lend. Not always so easy for the pre-retired if you are still putting a pension pot together and when the vagaries of the financial markets have seen the value of many people’s pots shrink radically in recent years.

Lenders wanting guaranteed proof of income in one’s retirement years have led to warnings being sounded that this may restrict pensions freedoms. A rock solid guarantee from a lender’s perspective means an annuity…

There is also the naïve assumption among many lenders that you are going to retire when you reach State Pension Age. That’s not the case for a large number of people, including those who are self-employed and plan to carry on being financially active well beyond 65.

There is a lot of pressure on lenders to take a more realistic approach to lending to older people, hence this move by Halifax and Nationwide. But from personal experience, I’d say there is still more work to be done to enable people to carry borrowing into later life – including the easy transition of a regular repayment mortgage into a lifetime one, where only the interest is served, or even one where the interest is rolled up.

The “equity release” market has now morphed into the concept of “lifetime mortgages”, and into the future, it seems logical that borrowers should be able to negotiate a tiered approach during the course of their later life – repaying capital while they are still able to do so, moving to interest only payments when their income reduces, and then into a situation where they simply live on the capital in their home and pay no interest at all.

It will all obviously depend on the level of equity in a person’s home, because no lender will want to have (effectively) a sitting tenant in a property for a decade or more, paying no rent, while they wait to reclaim their asset.

But in a market where we have still seen precious little innovation in response to the new pension freedom, a more imaginative approach to borrowers making use of their biggest single asset is urgently needed.

There are 12 million people in the UK aged 65 and over – a number set to continue rising for some time to come. This is an opportunity the lenders will pass on at their peril.

You can find out what converting your debts into a mortgage would do to your finances in later life by running the scenario on the free-to-use LifePlan at www.retireeasy.co.uk.

Even better, the new LifePlan Premium is about to be launched in July allowing you to test out, print and store multiple scenarios – including a new facility to input lifetime mortgages. Watch this space!

Tony Watts OBE

Hartley Watts Communications

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