Mortgage Lending in Retirement

October 21, 2015 by in category Mortgage News with 0 and 0

Brokers have warned that older borrowers who take advantage of the new pension freedoms and choose not to opt for an annuity could find it even harder to qualify for a mortgage into retirement.

Removing a framework that had effectively forced many in the past to take out an annuity, in April this year, the Government introduced unprecedented flexibility over how retirees could use their pension pots,

For lenders that are looking at whether a borrower can afford to continue repaying a mortgage annuities guarantee a set income for life, which makes them easier to handle

With retirees who opt for drawdown, which means leaving their money invested and taking out cash gradually over time, lenders have less certainty about their income, presenting a greater risk that they may not be able to keep up payments. With more employers phasing out final salary pension schemes, which also provide retirees with a guaranteed income, the affordability calculations for older borrowers are likely to become even more complicated and unpredictable for lenders.

“One of the worst areas of market failure at the moment is lending to older borrowers. The MMR, which placed the emphasis on affordability, was written before the pension freedoms came in, John Charcol senior technical manager Ray Boulger (pictured) says.

“The majority of major lenders ignore drawdown or investment income in their affordability calculations, so it could create real problems for borrowers who take advantage of the new freedoms and then need a mortgage that continues into retirement. If the pension income is something other than an annuity, most lenders will just ignore that income.

“There is a fear that, if they have access to all their retirement savings, those pensioners might just blow the money on a Lamborghini. But I don’t think it is fair to assume that the majority of older borrowers would be that irresponsible. Even somebody who is earning a salary could blow their money and get into difficulties.”

Most lenders will require an evidence of pension income if you want to go beyond retirement on your residential mortgage.

Using high-yielding rental properties as an alternative the new pension freedoms have led to many people deciding to cash in their pensions at the earliest oppor­tunity. However using this to support a residential mortgage application will simply not be accepted due to the risk of rental voids.

 

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THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.

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