I’m 68 and retired from my full-time job last year.
I have just taken advantage of the pension freedoms, drawing down the tax-free lump sum of my pension in cash, which I have reinvested into the stock market and funds to give me a bit more flexibility.
Now I’m due to remortgage and my lender is being difficult about my income – it won’t accept all of the income I earn from my investments and says only half counts towards my mortgage payments.
Remortgage woes: a specialist mortgage broker can help borrowers with complicated affairs
I really don’t want to have to sell some investments to pay down the mortgage so that the sums work on my remortgage.
Even more ludicrous is that remortgaging will actually save me money on my monthly payments, which I am already paying.
This seems mad. What are my options?
Sarah Davidson of This is Money replies: You are not alone in finding yourself in this conundrum, especially if you’ve retired after 2014 and haven’t needed to remortgage before now.
The reason for this is the Mortgage Market Review – a set of rules imposed on banks and building societies by the City watchdog, the Financial Conduct Authority from April 2014.
These fundamentally changed the way that mortgage lenders had to assess borrowers’ applications.
Previously, they’d calculate what you could borrow on a multiple of your annual income.
Following the introduction of these rules, they must look at your full income picture, its reliability, your living costs and other expenditure and then work out if you can ‘afford’ the repayments from what’s left over.
There were several other changes that resulted from the new rules.
Investment income is variable, so most lenders will only accept part of your expected income as being reliable to calculate your affordability for the mortgage.
Additionally, because a large number of retirees rely on variable income like this (more so since annuity rates fell through the floor following the base rate cuts to 0.5 per cent in 2009) older borrowers have found it more complicated to get a mortgage.
Then there was the rule that required lenders to be able to show that borrowers would be able to afford the repayments for the full-term of the mortgage.
This pulled maximum age limits way down, especially for those – even in their 50s and still working – who didn’t have a final salary pension or know what their income in retirement would be 25 years hence.
Maximum age limits have since started to rise again with the building societies leading the way on this, so don’t be disheartened.
One more thing, you don’t mention whether you’re on an interest-only mortgage but these have also got harder to secure, with many lenders requiring that borrowers switch to a capital repayment deal when they remortgage onto a new product.
This would see your monthly payments jump even if the rates on offer are lower than you’re already paying.
This might all sound rather depressing but there are actually a number of options for you to consider so don’t despair.
Smaller lenders and building societies have made it their business to help people in just your situation over the past few years.
The best thing to do is speak to an independent mortgage broker who specialises in helping older borrowers get a good deal and who will have access to a range of lenders that will help you.
To give you a further idea of what one of these lenders might be looking for, we asked a building society chief executive who specialises in cases just like yours to answer your question.
Mark Bogard: CEO of Family Building Society
Mark Bogard, chief executive of Family Building Society, replies: There are lots of moving parts in your situation that need to be looked at carefully.
You need to consider your income, your expenditure, your pension, savings and how long they need to last, where you want to live and what kind of mortgage you want, for how long and for how much.
Since you have retired you will have the income from your remaining pension(s) and from your savings, which will include what you took out of your pension. It may well be that you invested this money into a Sipp (self invested personal pension).
Lenders that are prepared to lend to people over 65 – and there are quite a few – will look at the pot you have and assume a growth rate for it over the years. In the current very low interest rate environment that may be 2 per cent a year.
If you can demonstrate that you have been able to achieve higher rates of return, then they may go up to around 5 per cent a year.
As you have invested a large part of your pot in the stock market and funds, you are running quite a high level of risk should there be a market fall.
Pay down the mortgage?
These sorts of levels of return are interesting because they are a similar sort of range to the rates of interest currently available on a mortgage. This means that you may want to use some of your savings or pension pot to pay down the mortgage.
The returns on your savings and investments may be higher or lower than the rate of interest on your mortgage. If you think that they may be lower and/or prefer the certainty, paying down some of the mortgage may be the right thing for you to do.
Expenditure and affordability
If you do want another mortgage, a lender will look at how much money you need to draw out of your pot each year to live and pay the mortgage for the period of the mortgage. Is that realistic?
And you will then have to consider how much money you will need to be left in the pot at the end of the mortgage to continue to live in the way that you want to. This will obviously be a function of how much you take out each year versus the rate of growth that you are actually achieving.
There are other potential factors.
Could you downsize your home to pay off the mortgage and perhaps release cash on top of that? Do you want to do that now? Sometime in the future? How much cash would be realised by doing that?
What type of mortgage and for how long?
Assuming that you want to stay in your current home for the time being, and that you are not able to substantially reduce your mortgage, your choice of mortgage term and type will be important.
You may be able to get a mortgage term of up to about 17 years. You may not want or need such a long term depending on your plans for the future, especially if you will look to downsize at some point.
You may want to get an interest-only mortgage. As the name suggests, with this type of mortgage each month you only pay the interest on the balance outstanding.
You are not paying down any of the amount that you owe, which remains the same all the way to the end of the term, when you must pay the outstanding amount back, for example by downsizing.
This means that the monthly payments are much less, especially over a shorter term such as 10 years, making the mortgage more affordable.
You may also want a fixed-rate mortgage that gives you certainty of the monthly amount due.
Conclusions
There are lenders out there that will give mortgages to people in your situation. As always, the key is for it to be affordable.
As your situation is complicated, and only some lenders will look at it, you may well benefit from seeking advice from an independent mortgage broker.
If you do not want to have a mortgage hanging over you, downsizing may be an option, now or sometime in the future.
