A staggering eight in 10 borrowers over 55 who expect to be able to renew their mortgage are being turned down by mortgage lenders, This is Money can reveal.
A study carried out by broker Retirement Mortgage Service over the past year found that more than 30,000 retired borrowers got in touch with their advisers, with 2,540 making a full application to refinance their mortgage.
But just 438 of these customers were able to refinance onto another mortgage, a retirement interest-only mortgage or a lifetime mortgage.
The remaining 2,102 customers were met with the reality that they didn’t qualify for any product that met their needs.
While it’s not a statistically representative poll, it nonetheless points to the likelihood that scores of older borrowers attempting to remortgage will have no choice but to lapse onto their lender’s expensive standard variable rate, effectively making them mortgage prisoners.
The study found some 83 per cent of over-55s are turned away when they try to remortgage
Mortgage lenders have limits on how old a borrower can be when they take out a loan and how old they will be when it ends. The closer the borrower is to the maximum age, the less time they will have to pay off any new mortgage.
This raises monthly repayments, making lender affordability tests more difficult to pass – especially for those who rely solely on pension income – making it much more difficult for older borrowers to qualify for deals.
There are some mortgages designed with older borrowers in mind, but as the survey from illustrates, even these carry affordability rules which bar most people from accessing them.
This is particularly worrying for the thousands of interest-only mortgage holders who are set to see their loans mature with no repayment plan in place in the next few years – one in nine of whom are over 65 years of age.
It also spells trouble for any older borrower trying to use their home as security to borrow a lump sum, be it to help a loved one, make home improvements, or top up a regular income.
The evidence suggests that many of these borrowers are unaware that they will have difficulty accessing finance in their later years. RMS found that many over-55s applying for a mortgage were attempting to borrow at ratios of more than 10 times their guaranteed income.
Steve Wilkie of Responsible Life, parent company to RMS, said: ‘Retirees are being frozen out of the mortgage market because they are being sabotaged by affordability rules that are not fit for purpose.
‘The interaction between products and their features in the later life lending market must be urgently addressed if they are to meet societal needs. The country would feel a net benefit from improvements in these areas.’
What are the options?
Previously the only option for many older borrowers with mortgage debt they couldn’t repay was to sell their home and hope they had enough equity to fund the purchase of a smaller property.
But with house prices having rocketed over the past 20 years, it’s not always possible. This left thousands of borrowers unable to repay their loan, unable to remortgage and unable to afford to downsize.
Many homeowners are unaware that they will have difficulty borrowing in their later years
Equity release has pitched itself as an alternative to a traditional mortgage, allowing homeowners over the age of 55 to remortgage the debt to a lifetime mortgage with no monthly repayments.
Know the risks of equity release
Equity release rates are lower than they have been in the past but these loans can still end up costing you much larger sums in the long run than traditional mortgages.
The most important thing to remember is that the interest on the loan has ‘rolled up’, meaning it has been added to the original loan.
There is also a compounding effect, meaning that you’re not just paying interest on the loan, but interest on the interest that you’ve already paid on the loan.
If the loan is taken over a long enough period of time, this can reach a point where the money owed starts growing exponentially.
Just because this money isn’t coming out of your pocket each month doesn’t mean you’re not spending it – it’s effectively coming out of the equity in your home.
It has also positioned itself as a way for older borrowers to access a lump sum quickly.
While it is becoming an increasingly popular option for this age group, equity release comes with its own risks and can be a very expensive way to stay in your home.
There are also strict limits on how much you can borrow, so borrowers with only a small amount of equity in their homes are unlikely to pass muster.
You absolutely must talk to a specialist adviser to see whether it’s the right option for you.
You might also have heard of retirement interest-only mortgages. These were given the green light by the financial regulator a few years ago and were seen as an alternative to – and potentially cheaper option than – equity release.
These deals allow homeowners aged over 55 to borrow on an interest-only basis without a repayment plan and make normal interest repayments like you would with an ordinary mortgage.
However figures obtained by This is Money last year showed the number of retirement interest-only mortgages taken out has remained pitifully low.
These deals operate on a ‘sole survivor’ affordability basis. This means that each borrower in a couple would need to be able to afford the repayments on their remaining guaranteed income if their spouse were to die.
This dramatically reduces the borrowing power of retired couples at the outset.
How will this affect interest-only borrowers?
While a lack of finance might force many borrowers onto their lenders” standard variable rate, interest-only borrowers with no repayment plan in place risk losing their homes if they can’t access a new loan.
According to the Financial Conduct Authority’s most recent figures in 2018 there were 1.67million full interest-only and part capital repayment mortgage accounts outstanding in the UK.
This amounts to around one in five outstanding mortgages. One in nine of these is held by over-55s, equal to around 185,370 households.
>> Use our interest-only mortgage timebomb calculator to see what you owe
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