Could your mortgage last longer than you do?
The age limit for paying off some mortgages has risen to 85 – three years beyond current UK life expectancy. It’s good news for older people who may have feared lenders wouldn’t touch them, but what are the implications of your mortgage outliving not just your job, but you too?
Owning your own home is happening later and later in life. The age of the average first-time buyer in the UK is hard to pin down – some research (by the Sunday Times) puts it at 31, while other estimates have it as high as 38 and still rising. Regional variations are a factor, but one thing is clear: the average age of property ownership has soared in the past 20 years. Nor are house prices alone to blame – rather, the problem is the widening gap between those prices and average earnings. In other words, even when house prices crash (as they did in 2008) homes don’t become any more affordable.
Since 2007 the average first-time buyer deposit has shot up by 88 per cent, while the 100+ per cent mortgages that were commonplace went extinct almost overnight. However, recent news indicated that the deposit-free mortgage is making a comeback, even as buyers take out longer and longer mortgages – some with terms up to 35 years.
From July, the Nationwide building society is raising its age limit for mortgage repayment from 75 to 85, and other lenders are making similar moves. This trend towards looser lending criteria opens up the prospect of people paying for their homes literally until they die.
What it means for home-buyers – and home-owners
There are many reasons to welcome this development, wherever you are on the housing ladder. For example:
More options for the over-60s: Traditionally, the majority of older people have simply been refused mortgages. This has forced them to take retirement decisions based solely on what they can afford without a new mortgage, limiting their options and often forcing them to stay in a property that is no longer suitable for them.
Rightsizing: It’s generally assumed that people will downsize when they retire – but it’s not always that simple. You may indeed prefer a smaller house, but want it to be in a more desirable area (known as ‘rightsizing’). In which case, the cost may be similar or even greater, so you may still need a mortgage. Remember too that moving costs alone can set you back tens of thousands.
The dream home – at last: The fact that first-time buyers are now nearer middle age has effectively squeezed the whole property ladder. If you can only buy your first home when nearly 40, then you don’t seem to have much time to scale up to your dream home. But now turning 60 no longer means it’s ‘game over’ – the chance of a 25-year mortgage means you can still aspire to own that big house by the sea.
Getting the market moving: People being ‘stuck’ in their family homes because they can’t get a mortgage can hold up the whole housing chain, taking those homes out of the market and ultimately reducing the number of properties available for first-time buyers. Making it easier for older people to move on should benefit buyers at every level of the property ladder.
‘Never’ pay off your mortgage: So long as the value of your property is enough to pay off the balance of your mortgage, you could in principle let it be settled after your death from the proceeds of the sale. However, you may want to factor in any possible impact on your family – for instance, a crash in house prices might result in you leaving only a debt to your loved ones.
Are there any downsides?
Although the announcement is good news, there are important issues to consider before you contemplate a later-life mortgage.
Lending criteria: Nationwide’s new mortgage has strict lending criteria. Loans can be no larger than £150,000 and can form no more than 60 per cent of the property value at the time of purchase.
Affordability: The usual criteria also apply, in that borrowers must demonstrate their ability to keep up repayments. Evidence of robust pension arrangements will therefore be essential – you may wish to book a free pension check in advance to strengthen your position.
Think about your family: If you think you may die before your mortgage is paid off, discuss this with your family so they know exactly what to do. Though it’s unlikely that a price crash could take more than 40 per cent off the value of your new home, it’s not impossible, so bear this in mind. Also remember that the property may take some time to sell, and that the mortgage payments must be maintained in the meantime (it will probably be better for your family if the home is actively sold rather than simply repossessed). Make sure it is clear whose responsibility it will be to keep paying the mortgage in the meantime. Most importantly, ensure you have a made a will that factors in all these arrangements.
Can you really keep paying off a mortgage in retirement?
This is the big question, and it’s one that lenders will no doubt consider on a case-by-case basis. Much may depend not just on how much pension you have, but on how you choose to access it. An annuity may be an advantage here, in that it provides a guaranteed income for life – if you can prove that the income itself is sufficient, then in some ways you are in a better position even than someone in employment, as your income will never stop or be interrupted. However, it will probably need to be a very good annuity to cover both your mortgage and your living costs.
Drawdown schemes may causes lenders to be more cautious, as poor management (or poor fund performance) can seriously deplete your savings, and the pot of money can run out altogether. Against that, you may be in a position to access lump sums to help pay off the mortgage early.
Financial advice may well be essential for anyone contemplating this type of mortgage. Your adviser can help in a number of different ways: firstly by working out whether you really can afford it, secondly by drawing up a retirement plan that makes it possible, and thirdly by providing the evidence that the mortgage lender will be looking for. A later-life mortgage, more than any other, will be about considering all your financial arrangements as a whole, and planning ahead.
To discuss this or any other kind of mortgage in more detail, find your financial adviser using our smart postcode search.