The following is for those in, or approaching retirement
If you’re currently retired or looking to borrow in retirement, then finding the right pension mortgage providers can be difficult for a number of reasons.
Every lender is different in what they do and don’t accept when it comes to a pension backed mortgage in retirement, and the good news is that there are several specialists happy to consider using a pension to pay off a mortgage under certain circumstances.
The key criteria lenders assess are:
- What type of mortgage are you looking for? (Traditional mortgage Vs Equity release)
- Are you currently retired, or working but looking to borrow into retirement? If future when will you retire?
- Your current age at the point of application?
- Your age at the end of the mortgage term?
- The type of pension income?
- How long has the pension income been paid?
- Do you have any other income to support the application?
- Other standard criteria such as overall affordability, Loan to value (LTV), credit history, and property type.
What type of mortgage are you looking for?
Traditional mortgage vs equity release
When looking to borrow into retirement there maybe more options than you think, partly because some lenders are more flexible than others, and partly because those borrowing over the age of 55 can qualify for equity release if there is enough equity in the property.
Traditional mainstream mortgages are possible to obtain with no maximum age, using 100% of the pension income, and certain lenders can consider loans up to 4-5x income, with certain adverse credit issues depending on your circumstances.
Equity release scheme
Equity release however, can offer many borrowers (looking to refinance their home to release capital) far more flexibility and greater scope, such as:
- No monthly repayments
- Borrowing with no income assessment
- Borrowing far larger loans if traditional mortgages aren’t affordable
- Borrowing with even more severe adverse credit (i.e. IVA, Bankruptcy, Repossessions etc. when perhaps traditional lenders may not lend)
This is made possible as the loan released to the borrower already has the interest and charges added to it at the point of assessment, and these are recouped by the lender when they assume control of the property (when the borrowers die), and as such if done in this way, there is no risk to the lender of default, as there are no repayments for the borrower to make!
Interest only pension mortgage
Interest only mortgages have the benefit of lower monthly repayments, however you’ll still need a strategy to pay off the capital at the end of the loan period. This is called an interest only mortgage repayment vehicle and can take the form of savings, investments, shares, bonds or the sale of another property.
We have quite a few people asking us, can I pay off my mortgage with my pension pot?
The answer is, yes. Some lenders are happy to accept the 25% tax free lump sum you’re able to draw out of your pension when you retire.
So for instance, if your pension pot is worth £100k, you have the potential to borrow £25k on interest only.
How much interest should I expect to pay on a pension mortgage?
Pension mortgage interest rates are the same as for anyone else. It essentially depends on your income, credit history and how much deposit you have.
All lenders are different, which is why you should talk to one of our advisors. We have access to the whole market, not just a handful of lenders, so we should be able to find the best rates for you.
How will bad credit affect my application for a mortgage with pension income?
If the question is, can I get a mortgage using my pension with bad credit? The answer is a simple ‘yes’, depending on your circumstances. Some things that may affect your application are:
- Adverse credit overview
- Low credit score
- Mortgage Arrears
- County Court Judgements (CCJs)
- Individual Voluntary Arrangements (IVAs)
- Debt Management Plans (DMPs)
Can I get a mortgage when already in retirement?
You can get a mortgage on a pension when you are retired, but it can be very different to borrowing before retirement.
If you only receive pension as income, then it is usually the gross figure lenders will use to establish what you can afford to borrow.
Typically lenders offer between 3-4x gross income (so for £20k a year = £60-80k, although some can consider 5-6x in certain circumstances), but for those in retirement this can be reduced as often the max age limit means the maximum mortgage term is less than for someone in their 30’s, for example.
Can I get a mortgage when working, that stretches into retirement?
If you’re looking to borrow on a mortgage term that runs past your expected retirement age, the process can vary lender to lender, generally depending on how close to retirement you are.
Many lenders will state that those borrowing into retirement at all will be required to evidence how they’ll afford the mortgage when working income ceases – demanding pension projection statements and all sorts.
Others are less picky and so long as the mortgage is affordable using working income, and there is a solid plan to repay, then fewer documentation is required.
The cut off for whether more evidence and documentation is needed is often if the application is within 10 years of the expected retirement date (for example, a 55 year old who plans to retire by 68 and borrow until 70, is 12 years from retirement and may not need as much evidence as a 59 year old in the same scenario).
How does my current age impact getting a mortgage on a pension
Many lenders cap the age at application to a certain level, often 60-65, however there are some who specialise in mortgages for older people with higher or indeed, no maximum age limit.
The advisors we work with know which lenders will allow a mortgage on pension income, and those which have higher or no age limit.
Older borrowers can be considered as carrying greater risk as they have a higher likelihood of falling ill; and having a greater financial pressure to cover the cost of care or accessibility changes to their home, as well as being deemed ethically more difficult to repossess (a fair amount bad press would come with kicking a pensioner onto the streets!).
How does my age when the mortgage is cleared impact lending decisions?
As with maximum age at application above, for similar reasons there are often limits for a borrowers age at termination/repayment of the mortgage. Many lenders cap this at retirement age, some at age 70-75, and thankfully there are some with no maximum age limit at all (so technically, borrowing to age 100+ is possible if the mortgage is considered affordable).
What type of pension income is acceptable?
In the case of a mortgage for people on a pension, mortgage lenders are required to establish if the income is suitable and viable to sustain repayments throughout the term of the mortgage.
Pension income is just about as reliable and stable an income as one could receive, so long as it can be evidenced as such, and most lenders will consider 100% of the income (for other income types some lenders only consider a smaller % than actually earned, depending on risk).
There are many different types of income that could be considered for a mortgage application:
- Employer pension income
- State pension income
- Private pension income
- Widows pension income
- Armed forces pension income
- Self-employed retirement income
- Disability pension (benefits)
To evidence these, lenders will usually want to see pension statements (act as payslips and indicate gross and net pay as well as tax paid etc), perhaps a pension certificate/contract if recently retired, or for those who own a business, business accounts and/or self-assessment documentation (common for those who receive rental buy to let property income in retirement, or perhaps own shares in a business they have little involvement with – figures used would be share of net profits, or salary+dividends, depending on lender and trading style).
What proof do I need that the pension income been paid?
Most lenders ask for monthly pension statements / payslips and corresponding bank statements to evidence these payments being made, so they can assess mortgage affordability on a pension.
Some require the latest month, some 3 months, and the odd one or two require 6.
For this reason many borrowers are instructed to wait until they have the appropriate number of months before they can apply – this isn’t the case as some don’t need any and will lend before or from day 1 of retirement, so long as there is enough documentation to back up the figures being used.
Is there any other income to support the application?
If the borrowers have other income (perhaps part time or casual work), then some lenders can consider it as well as the pension income, depending on how long the borrower plans to work there, how long they have worked there, and if its feasible they can sustain the role (i.e. a bricklayer at age 75 may not be approved).
In this scenario someone with a pension income plus a part time role earning £5k a year would potentially be able to borrow an additional £20k, if the lender offers borrowers up to 4x income.
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Is health a factor when applying for pension mortgage?
We are asked regularly whether ill health can impact a pension mortgage approval in the UK, and generally the answer is that lenders are not allowed to discriminate based on health, and as such borrowers would/should never be asked the question about their health.
Is insurance necessary for a mortgage pension?
It may well be more expensive, but for those borrowing for a mortgage on a pension, insurance can be all the more important, especially if pension income from 2 applicants are both necessary to meet monthly repayments, and the pension does not transfer should one of them die.
Transferring a pension if one partner passes away
This is a sad and tragic time for the surviving partner, especially if the deceased partner had a higher pension.
Whether you can transfer their pension depends on the pension schemes rules and policy conditions. Usually pension schemes will only transfer pensions to a legally married spouse or civil partner.
Can I add my pension to self-employed income for affordability assessments
The answer is yes, but the same criteria applies in regard to income and affordability in regard to affordability. Self-employed have a number of obstacles to overcome, including how long they have been trading and proof of income.
Later life lending
I want to try and help my children or grandchildren get onto the property ladder, but I only receive a pension and I don’t want to use my savings… is there anything I can do?
Yes! There are now several ways in which you are able to raise capital from your property to support your family, carry out home improvements, or even to have that once in a lifetime holiday.
There are now many schemes which allow you to lend into later life, there are equity release options and retirement interest only mortgages.
Historically, there have been scary interest rates and all kinds of “hoops to jump through” to look at this borrowing, however now is a great time to assess your options. Our experts will guide you through the process and ensure that everything Is explained in a clear, straightforward & ethical manner, contact us for more information.
How to use later life lending to raise capital…
Whether your current rate is expiring or you feel it may be best to change and face a possible early repayment charge we can help.
Whether you are moving from your first house or downsizing to something smaller after the kids have moved out, we will be able to help.
If you are lucky enough that your house has increased in value since you bought it, you may want to release some of the equity you’ve accrued.
If the worst does happen having the right cover in place will lesson the strain for you and your family. We can help get the most comprehensive cover.
Buildings and contents insurance will provide you with peace of mind and help to protect you from potential financial hardship.