The problems of first-time buyers, remortgagers in negative equity, home-movers struggling to move up the ladder and the like are well documented. But one group of people is rarely mentioned in mortgage advice: the older borrower.
When I say old, I don’t mean ancient. Potential borrowers in their 40s could find getting a 25-year home loan a struggle.
The issue mortgage lenders have isn’t so much the borrower’s age when they take out a mortgage (although you generally have to be at least 18), but the age they will be when it’s paid off at the end of the term.
Most lenders state that the mortgage must be paid off by the time the borrower reaches 75, but almost all include a clause saying the mortgage must be paid off by retirement – which lenders generally view as at age 65 – unless the borrower can prove their retirement income.
I did a quick ring round to see what various lenders say. Yorkshire Building Society said that a mortgage must be paid off by the time the oldest applicant reached their 75th birthday. However, the society says that any mortgage that extends into retirement would be looked at more closely, on a case by case basis. The society assumes that people retire at 65 — despite the fact that the default retirement age is being scrapped and people are choosing to, or being forced, to work longer.
Santander requires that the mortgage be repaid by the time the borrower is 75, while Woolwich sets the limit at 70.
HSBC told me that as a rule of thumb the bank doesn’t lend interest-only beyond 65-years-old, and on a repayment basis beyond 75. But the bank admits that more often than not if you are looking to borrow beyond 65 then your application will be manually underwritten.
This process will focus on the individual’s ability to make repayments as they get older. Chances are, if your profession enables you to work later on in life you’ll be OK, but if age is likely to stop you working, you might not be.
There are a few lenders, such as Leeds Building Society, who are more flexible than others and will allow mortgages to the age of 85 as long as the borrower can prove they can meet the repayments out of income after retirement, usually through a pension or savings.
Are you a first-time buyer over 40?
When you think about the struggles faced by first-time buyers these days, someone getting their first mortgage when they’re 40-plus isn’t such a rare thing. In fact, a report by Scottish Widows last month predicted that the average age of a first-time buyer could hit 44 before too long if young people don’t get their heads round saving early on.
A quick simple bit of maths: If you took out a 25-year mortgage when you were 44, you’d be 69 by the time it was paid off. So you’d be past the current retirement age which means lenders would want to know not just about your income, but about your plans to fund your retirement.
In many cases, banks’ closer scrutiny of mortgages that will still be running when the borrower passes 65 don’t make sense. The current default retirement age of 65 will be phased out later this year. It means employers will no longer be allowed to dismiss staff just because they have reached the age of 65.
Many people will choose to work beyond this age, at least part-time. Some won’t have much choice if they’ve spent the preceding years forking out for education fees or bailing out adult children with cash for a deposit for their own home.
What should borrowers do?
Borrowers aged 40 or over should think carefully when making an application. The obvious solution is to take out a mortgage over a shorter time period than 25 years — there’s nothing to say a mortgage must have a 25-year term. In most cases the minimum term is five years. However, this will of course impact on monthly repayments and affordability.
Anyone approaching retirement age when their mortgage is due to end should take advice from a mortgage broker. They’ll be able to point you in the direction of sympathetic lenders and keep you up to date with any that have revised their upper age policy.
Visit KPM Financial Services for further information and facts