Most people’s objective is to pay off their mortgage before they retire, but there are some instances where borrowing in later life could be appealing.
You might want to retire to an area where homes are slightly more expensive, release funds to pay for home improvements, or move from rented accommodation into a home of your own.
You might even be weighing up whether a buy-to-let property could supplement your retirement income.
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Getting a mortgage in retirement could come with challenges though. The most obvious one is whether you can afford the interest and repayments if you aren’t earning a salary.
Another is whether the bank will agree to loan you the money in the first place.
A mystery shopper exercise conducted by the Family Building Society found instances where older borrowers with “secure incomes” were being refused the mortgages they “wanted and could afford”.
The building society designed three scenarios with hypothetical applicants aged 67-84, and three mirrored versions with younger applicants aged 42-55. Multiple calls were made to each mortgage provider, with the test involving 72 enquiries in total.
All of the older borrowers’ applications were rejected by the big six lenders – Lloyds, NatWest, Barclays, HSBC, Santander and Nationwide.
Most of the requests were rejected on the grounds of age or only considered on a reduced mortgage term so that the borrowing would end before the lender’s upper age limit, significantly increasing the monthly repayments.
The Family Building Society has criticised the big six lenders for discriminating on the basis of age, arguing that older buyers with “solid pension pots” may be “more secure than those of working age, who could be made redundant with little warning”.
However, with pension savers living longer than ever before and many having to stump up for care costs in later life, there are risks when signing yourself up to debt.
Were the banks right to refuse older savers a mortgage – and is signing yourself up to a mortgage in retirement always a bad idea?
Steve Webb: It depends what sort of income retirees are able to pledge
One of the scenarios highlighted by Family Building Society in its mystery shopper exercise was a married couple, where the husband was 84 and the wife was 67.
They had a joint annual income of £60,000, and were looking to borrow £85,000 for a 10-year term against a £518,000 property – a loan-to-value ratio of less than 17%.
All of the big six high street lenders refused the application, according to the Family Building Society’s survey.
This might seem surprising given the couple’s generous retirement income and the small size of the loan relative to the property.
However, as former pensions minister Steve Webb points out, a lot depends on the nature of that income.
Webb, now a partner at consultancy Lane Clark & Peacock, told MoneyWeek: “In principle, someone with a secure income from the state pension plus a final salary workplace pension can be relied upon to pay a regular cost like a mortgage.
“Indeed, in many ways, their income is more secure than someone in work who could lose their wage due to unemployment or sickness.
“But problems could arise if a joint mortgage is issued and the person with the company pension dies. Their surviving spouse would have unchanged mortgage costs but a drastically reduced income and potentially be unable to service the debts.”
Savers already at risk of pension shortfall
A defined contribution (DC) pension – the most common option for younger savers – would be even less secure as a source of income.
With this sort of pension, you are not guaranteed a specific amount of retirement income. The size of your pot depends on how much you paid in during your working life, and how your investments have performed.
You can buy an annuity but, even then, the amount of income this pays out will depend on how much your pension pot is worth.
This means there is a far greater risk that savers will run out of money before they die.
Many underestimate how much they will need in retirement, how long they will live, and how much things like care will cost them.
For example, a £1 million pension pot sounds like a very nice sum, but analysis from wealth manager Brewin Dolphin shows that a 66-year-old retiring with a pension of this size would only be able to draw an income of £63,000 a year until age 86.
If the saver were to live to 95, they would only be able to draw an annual income of around £50,000.
This is enough to live comfortably but not necessarily in the lap of luxury, particularly if you are still paying housing costs like mortgage repayments.
For context, the latest figures from the Pension and Lifetime Savings Association (PLSA) show the cost of a comfortable retirement is now £43,100 per year for a single person and £59,000 for a couple, excluding housing costs.
Renting in retirement isn’t ideal either
As with any financial decision, the pros and cons of taking out a mortgage in retirement will depend on your personal circumstances.
If you are taking the loan to fund home improvements or to relocate to a more expensive area, you might not feel the trade off is worth it when you consider the knock-on effect on your retirement income.
If you are currently renting and want to move into a home of your own as you enter your golden years, you might feel there is more of a case for it.
The FCA’s director of retail banking Emad Aladhal recently pointed out that “average mortgage payments are currently 20% lower than rental costs”, meaning that “renting in retirement could require £400,000 more in savings than owning a home”.
Again, a lot will depend on the size of the mortgage you are intending to take, the size of your deposit, and your monthly retirement income.
What about buy-to-let?
As we explore in a separate “pension versus property” piece, it is generally a bad idea for savers to neglect their pension in favour of buying a second home.
One of the reasons is that pensions offer valuable tax relief, while investment properties do not.
Furthermore, some of the tax perks that used to be available on buy-to-let homes have been dialled back in recent years, as the government sought ways to boost tax revenues and free up the housing market for first-time buyers.
These arguments all centre around those who are still saving for retirement – but what about those who have already crossed the rubicon?
Many retirees like the idea of having rental income to supplement their pension savings. With this in mind, is there ever a case for taking out a buy-to-let mortgage to purchase an investment property?
Some of the considerations will be the same as those outlined previously, although many buy-to-let mortgages are interest-only products. This means you won’t have to repay the capital.
Despite this, prospective borrowers may still have a tough time persuading lenders to overlook their age.
“Although the borrowing amount will be mostly based on the rental income covering the mortgage interest by a certain margin, many lenders will have a maximum age limit at the end of the mortgage term,” said David Hollingworth, associate director at broker L&C Mortgages.
“That will vary from lender to lender with many expecting the mortgage to be repaid by age 80 or 85. However, some will have more flexibility and may not apply any age limit at all, so there should be options.”
Hollingworth points out that gaps between tenants – void periods where no rent is being received – are another big consideration. “If there’s no rental income coming in, the mortgage will still need to be paid, so rather than boosting income it could put pressure on the monthly income,” he said.
Stamp duty costs are another thing buyers would need to stump up for. It is worth considering these costs and how they could erode your returns.
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