Paying off a mortgage before retirement isn’t realistic for many people today.
We are living and working longer. And that means we’re buying homes later in life.
More people over 65 want to be able to pay a mortgage until much later in life.
The problem is, lenders can be wary about lending to people who are retiring soon.
1. How does a retired person qualify for a mortgage?
Getting a mortgage in later life isn't always easy. Even if you have plenty of equity in your home, have never missed a mortgage payment, and are still earning a wage.
Lenders are strict about who they offer loans to, and often have upper age limits. This can make securing a new mortgage past 55 more complicated.
Some lenders will give you until 80 or 85 to pay off your mortgage, but others will require a mortgage to be repaid in full by 70.
This means it’s unlikely you’ll get a 30-year mortgage, which is generally more affordable in terms of monthly repayments.
All of this means older borrowers have found they have more limited choice when it comes to standard borrowing.
Shorter payment terms can also mean higher interest. This means that if you manage to bag a mortgage in retirement, your monthly repayments are likely to be high.
2. Why is it so difficult to get a mortgage as a retired person?
One reason lenders don’t offer mortgages to older borrowers is because it’s difficult to prove your income in retirement.
While proving a salary is easy, pension income is less straightforward as it can involve lump sums.
That said, lenders are willing to offer mortgages to those who can prove they can afford a home loan in later life.
3. What can I do to boost my chances of getting a mortgage in retirement?
The key is to show you have a stable and ongoing income.
Show that you have a secure pension to cover mortgage repayments. This might be a combination of private and/or state pension.
Show evidence of any other sources of income after you have retired.
Demonstrate that a mortgage will remain affordable. This involves you providing details of your expenditure, your pension and savings – and how long they need to last.
Lenders will also want to take into consideration issues that might affect your future income, such as health and care costs.
Borrow a modest amount, rather than the maximum income multiple available to you.
4. What mortgage options are available to me if I’m retired?
A repayment mortgage allows you to repay a bit of the loan along with interest each month.
The main advantage with this one is that you’ll own your home outright at the end of your mortgage term.
Every time you make a payment, the amount you owe gradually reduces. That means your equity stake (that’s the percentage of your home that you own) increases.
Homeowners with larger equity stakes can qualify for lower mortgage rates, as the best interest rates are usually reserved for those borrowing 60% or less of their property's value.
You’ll also have a greater choice of mortgage products if you’re on a repayment mortgage, as they are the most widely available loans.
With interest-only, you only pay the interest on the balance outstanding, making the monthly payments a lot more affordable. These mortgages may have a higher maximum age limit.
There will still be limits on the amount of the property’s value you can borrow. You will also have to pay back the outstanding capital at the end of the term.
Equity release mortgages
A lifetime mortgage is the most popular of the equity-release schemes.
Equity release is where you release money that’s built up in the value of your home to free up some cash.
Lifetime mortgages are available to the over 55s to enable you to borrow money against your home, while retaining ownership of it for life.
The money you receive from a lifetime mortgage is tax-free and you can take it as a lump sum or as a series of smaller payments.
Neither the lump sum borrowed or any interest accrued on the loan need to be paid until you die or enter long-term care.
So you don’t have to make repayments with a lifetime mortgage, but do be aware that the interest on the loan can stack up over time if you don’t.
The loan is usually repaid with the sale of the house when you die or enter long-term care.
A buy-to-let mortgage could be more flexible because of the long-term rental income which could take you into retirement. That said, some lenders still apply an age cap.
Some lenders will take a more individual approach.
They look at applications on a case-by-case basis and may be more willing to consider older borrowers.
An independent broker who specialises in helping older borrowers will have access to a range of lenders who could help you get a good mortgage.
5. How do I take money out of my home when I'm retired?
If you’re not looking to move, but want to take equity out of your home, then you could look into equity release.
With a ‘lifetime mortgage’, you borrow money against the amount you’ve already paid off in your home.
It can be paid to you as a lump sum or regular income.
This money is paid back with interest when you die or go into long-term care.
There is a risk the cash will affect your entitlement to some means-tested benefits. So get some independent advice before taking this step.