In theory, there is no upper age limit for mortgages, although different mortgage lenders will have their own lending criteria. Consequently, it is essential to take professional financial advice to find the right mortgage deal for your situation. There are many factors to consider, some of which are obvious and others perhaps not so.
Many options are available, whether you are looking at a traditional mortgage, remortgage, lifetime mortgage, buy-to-let mortgage or a home reversion scheme. You may even be over 50 and be a first-time buyer!
Do over 50s need specialist mortgage lenders?
The simple answer is no. As you can see from the graph below, there has been a significant increase in life expectancy over the years. Males born in 2018 are expected to live 79.5 years, with females expected to live 83.1 years. This is a considerable increase from 1900 when the respective figures were 43.7 and 47.5. There has even been a marked rise from as recent as the 1980s. So what does this mean?
Longer life expectancy means that the vast majority of us will need to work longer to provide income for living expenses. The traditional retirement age of anywhere between 60 and 65 is a distant thought for many people. This has led to a massive change in the mortgage industry. There is now a greater appreciation of the income and the wealth of the over 50s.
Life expectancy at birth 1941 to 2018
In recent times we have seen the likes of Halifax, Santander, Barclays, Nationwide Building Society and other well-known companies providing more mortgage services for the over 50s. There are also many specialist brokers that offer mortgage funds for those in their 50s, 60s, 70s, 80s and even 90s on occasion. So, in reality, there is no age limit on mortgage lending; it will come down to income and assets available.
Mortgage affordability test
Before we look at the range of mortgage lending available for the over 50s, it is vital to recognise the potential difficulties with the mortgage affordability test. In the aftermath of the 2008/9 US mortgage crisis, which led to a collapse in the worldwide financial sector, governments and regulators introduced the mortgage affordability test. In the years previous, some lenders were offering mortgages of 100% and even higher in the property market boom times. Northern Rock was a prime example, one of the few financial failures in the UK in recent times.
Some experts argue that the mortgage affordability test is too restrictive. In contrast, others appreciate the need to tackle the problem of high-risk lending by doing more than just checking your credit score. Therefore, all applicants must undergo a mortgage affordability test when applying for a mortgage. Unfortunately, some individuals and couples aged over 50 will have experienced a reduction in their income and may fail the test.
Income considered in mortgage affordability test
The mortgage affordability test will consider mortgage repayments, living expenses and other outgoings against income, with various types of income considered. This includes:
- Employment income
- Self-employment income
- Private pension income
- State pension income
- Investment income
- Third-party income (such as trust income)
When applying for mortgage funding, the lender will typically ask for valuation statements and evidence of income dated within the last 18 months. They will also consider future tax-free lump sum payments from your pension scheme and other one-off sources of revenue.
Are over 50s mortgage applicants treated differently?
Again, the simple answer is no. If you put yourself in the shoes of a mortgage lender, whether or not you offer mortgage funding to a client simply depends on the amount required and the affordability factor. So, the process of applying for mortgage lending is the same for any age group, although the type of income used may vary. It is illegal to discriminate against individuals based upon their age, so any decision will be based purely on financials.
Different types of mortgage lending for over 50s
While many people tend to look at the challenges over 50s face in the mortgage market, the benefits are often overlooked. For example, many of those applying for over 50s mortgage lending may be looking to downsize. Consequently, there is every chance they could have significant equity in their home to release. In addition, as they may only require a relatively small mortgage, a mixture of pension and employment income may be more than enough to pass the affordability test.
We will now look at the different types of mortgage lending for over 50s and the pros and cons.
As we touched on above, most lenders in the UK are now more welcoming of those over 50 years of age applying for new mortgage finance. While most traditional mortgages are capital repayment (capital and interest repayments), if there is some form of collateral, interest-only mortgages might be available. Therefore, borrowers may be able to use investment assets or future pension fund payments as a means of paying down the capital at the end of the mortgage term. However, most of those over 50 will be looking towards capital repayment mortgages.
The affordability test could be a potential stumbling block for many over 50s looking to secure mortgage lending. Strict regulations mean that those that are rejected may need to look elsewhere. The good news is that additional options are available, some of which do not require an affordability test.
Like a traditional mortgage, those looking to remortgage their property often fall foul of the affordability test. They may have significant equity in the property, the required mortgage funding may be relatively low, but if they fail the test, it would be challenging to say the least. Unfortunately, this has precluded many homeowners from remortgaging their properties as a means of avoiding a lender's standard variable rate, locking into significantly lower mortgage rates and saving money.
Despite low interest rates, it would appear that some older homeowners are paying the price for historic so-called casino lending by some mortgage market participants.
Equity release/Home reversion scheme
Typically, the best way to release equity from your property is to remortgage. However, this option is not always available to those over 50 due to potential income constraints. Home reversion schemes are a form of equity release explicitly targeted at those over 50 years of age. While they have proven helpful for many people, they have attracted their fair share of controversy.
A home reversion scheme does not require an affordability test because you are simply selling a share of your property to a third party investor. The issue is that you will only receive between 20% and 60% of the property’s market value. So, for example, a 50% share of a £200,000 property would be worth £100,000 based on the market price. A home reversion scheme would only pay between £20,000 and £60,000 for a 50% share. So what are the benefits?
There are no monthly payments with a home reversion scheme because you have sold part of your property. You will be allowed to live in the property rent-free until the last homeowner dies or is transferred into long-term care. At this point, the property would be sold, and the proceeds split on a per-share basis. If you lived into your 90s, you could potentially live in the property rent-free for more than 40 years. During this time, investment funds from the home reversion company would be tied up.
A lifetime mortgage is another alternative for many over 50s homeowners looking to release an element of equity from their property. Again, this type of equity release finance does not require an affordability test because of the way it is structured.
Funds are borrowed against the property on what is described as an open-ended repayment basis. This means there is no set mortgage term for the loan. Upon the death of the final homeowner or move into full-time care, the property is sold, mortgage repaid, and the balance passed to the homeowner/their estate.
While interest will be charged, there will be no monthly repayments because it is added to the lifetime mortgage balance, attracting a degree of interest on interest. Due to the rollup of interest payments, the LTV range on a lifetime mortgage tends to be between 45% and 58% of the property's value. Compared to LTV ratios up to 80% on traditional mortgages, this seems relatively low but reflects the accumulated interest and investment risk. In effect, this is a degree of headroom which means negative equity is unlikely to be a problem.
On the subject of negative equity, new regulations have deemed that those who take out a lifetime mortgage have a guarantee from the mortgage company. If the arrangement moved into negative equity, they would not be pursued for additional funds. The Financial Conduct Authority (FCA) is now heavily involved in regulating lifetime mortgage providers.
Over 50s mortgages
Some mortgage lenders have created specific mortgage offerings for older borrowers. If you were to take out a mortgage in later life, you would likely need to reduce the duration to reflect your age. This is something you would need to discuss with the mortgage lender as you may be able to add collateral to the arrangement. The finances of those under 50 tend to be very different from the finances and assets available to those over 50. Many over 50s have benefited from the property booms of the 70s, 80s and earlier.
Getting a mortgage after 50
While those over 50 looking to secure mortgage finance may still be able to apply for a traditional mortgage and remortgage arrangements, the affordability test may scupper this for some people. Consequently, home reversion schemes and lifetime mortgages offer a helpful alternative. It is vital to take mortgage advice and understand the structure/liabilities created with different mortgage products.
It is fair to say that mortgages are more readily available for over 50s today than they were 20 years ago or even ten years ago. However, finding the best mortgage deal for your situation is not always easy!