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Pensioner Mortgages
It’s a common misconception that once you stop working, you are effectively locked out of mortgages - thankfully, that’s not the case. Increasingly, lenders are becoming more open to borrowing during retirement, using your pension and other alternative income to calculate affordability.
With specialist support and understanding, pensioner mortgages provide a route to financial stability in later life with products available both to secure a home, and to release the equity locked in your home to provide for a smoother retirement.
At Clifton Private Finance, we have the expert knowledge you need to access powerful and effective funding solutions when your pension is your primary income.
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Mortgages to Buy and Secure Your Home
A mortgage used to purchase or keep your primary residential property can seem out of reach for pensioners. Without an income from employment, traditional mortgages are quickly rejected. However, specialist products exist from lenders who understand that even later in life, there is a great need for secure home loans. These mortgages are tailored to look at income more holistically, considering not only your monthly pension drawings, but your greater financial picture.
Affordability in Retirement
One of the greatest challenges pensioned borrowers face is that of affordability. A calculation based on your income and outgoings, affordability checks form a central part of mortgage underwriting. Lenders must determine not only that you have the liquidity to meet monthly mortgage repayment obligations, but also that you would not struggle in difficult times. This stress test pushes the affordability check beyond simply matching disposable income to the expected mortgage payment by comparing current finances against higher interest rates and increased expenditure, and in most cases requires a far greater level of financial headroom than most borrowers expect.
During employment, affordability and stress tests are easier to pass thanks to the stability of a regular income. For many pensioners, however, the on-paper income that your pension provides is often too insubstantial to meet stress test criteria.
Solutions to the affordability question often require specialist involvement, presenting your finances in a more comprehensive way to reassure lenders and provide the security that underwriting demands.
Can I get a mortgage after I retire?
Yes. There are several specialist products designed for use in retirement, including RIO and lifetime mortgages. Your SIPP pension can also provide security for both interest-only and repayment mortgages.
SIPP Mortgages: Leveraging Pension Value for Affordability
Standard personal and workplace pensions provide an income, but are structurally inflexible and difficult to draw additional funds against. By comparison, a Self-Invested Personal Pension (SIPP) offers greater accessibility. Pensioners with a SIPP have the advantage that the agility of their pension gives lenders reassurance when making affordability calculations.
Lenders are looking for security when underwriting. In simple terms, their question is ‘will this person be able to pay the mortgage every month?’ A strong SIPP portfolio answers that question with a resounding ‘yes’, providing validated and confirmed paperwork that details that should the need be there, funds can be released from the pension to make mortgage payments.
In this way, lenders can build a ‘deemed income’ calculation based on the value of the SIPP.
Even if the actual drawings on the SIPP are low, its existence serves as a reassurance to lenders, meeting affordability and stress test requirements. Lenders know you could draw on the pot to make a payment should there ever be a need, so they are comfortable providing the mortgage. Note, however, that you cannot use your SIPP as a deposit; it’s only useful to improve affordability.
Can I use my pension as a deposit for a mortgage?
No. Pension funds serve as security for a house without being withdrawn (which has tax implications). Some pensions, such as SIPP, can serve to improve affordability checks.
Can I get a mortgage with only a small pension income?
Specialist lenders will test your affordability by combining both your income and your potential to draw on your pension if the need arises. They can also take into account other income streams, including investments and liquid assets.
RIO Mortgages: Interest Only for Life
Interest-only mortgages offer a comfortable way to invest in a home while keeping monthly expenses as low as possible. Traditional interest-only mortgages for residential purposes, however, require similar affordability and stress tests as a capital repayment mortgage, making them unsuitable for retirees who rely on a pension for income.
A specialist subset of interest-only mortgages exists for people aged over 55 - the Retirement Interest-Only (RIO) mortgage.
A RIO mortgage combines the core structure of a traditional interest-only mortgage, with the exit strategy-based repayment of a lifetime mortgage. In this situation, low monthly repayments are made to meet the accrued interest (as with an interest-only mortgage), with the balance of the loan repaid upon death, property sale, or a move into long-term care (as with a lifetime mortgage).
Should you struggle to meet the repayments, a RIO is typically converted into a lifetime mortgage, providing the lender with the underwriting security they need.
RIO mortgages are an effective product that can help when:
- Looking to buy a residential property later in life.
- Refinancing an existing mortgage in retirement.
Mortgages to Release Equity
For pensioners looking to enjoy a more comfortable retirement, releasing equity provides an answer. Many UK homeowners reach a stage where they have developed a strong real estate profile in their home, but find themselves cash poor, unable to find the money they want to enjoy their later years.
Equity release products exist to unlock the money tied up in your home. This range of pensioner mortgages involves loans secured on your property that either have zero monthly payment, or a low monthly payment in exchange for capital. The balance of the mortgage is then repaid by the sale of the house upon a significant life event:
- The death of the resident homeowner
- The resident homeowner moving into full-time care
- The house being sold for any other reason
Recent Equity Release Case Studies
Is equity release the same as a pension mortgage?
Yes and no. Equity release products are designed to provide capital for use in your retirement, but cannot be used to buy a house. Other mortgage options such as RIO or SIPP-supported mortgages are pensioner mortgages that can be used to purchase property.
Lifetime Mortgages
The standard equity release product is a lifetime mortgage. This provides a single capital lump sum for your use. Interest is then accrued over the remainder of your lifetime, with the balance eventually repaid from your estate.
Lifetime mortgages and other equity products have a number of safeguards for your security and protection including:
- The no negative equity guarantee - This ensures that the total owed on the mortgage cannot exceed the proceeds from the eventual sale of the house, protecting heirs from potential debt.
- Lifetime residency - A protection that guarantees that the homeowner(s) have the right to live in the property until their death.
Releasing capital in this way can be used for many purposes, including:
- Home renovations and improvements
- Inheritance tax and estate planning
- Debt consolidation
- Helping family members
- Retirement peace of mind
- Personal lifetime goals
Because roll-up equity release is secured fully by the exit strategy of an eventual property sale, there is no need for affordability or stress tests, making it a product that’s designed specifically with retired homeowners in mind.
To learn more about equity release, explore our knowledge base or book a consultation with an equity release advisor at Clifton Private Finance.
Drawdown Mortgages
A variant on the standard lifetime mortgage, a drawdown mortgage allows for multiple smaller drawdowns for equity release, rather than a single lump sum at the time of application. This can help minimise accrued interest, ensuring a smaller impact on the estate.
Drawdown mortgages are particularly useful for homeowners looking to provide funds to see them through their pensioned years, with set points of capital release throughout retirement.
Home Equity Lines of Credit (HELOC)
A specialised equity release product that’s relatively new to the UK market, a home equity line of credit (HELOC) is a completely flexible alternative to a lifetime mortgage that works in a similar way to a credit card, with a large credit limit based on your property value. It allows you to draw on your equity release as and when needed, generating interest only when the capital is used.
Many HELOCs also have an initial term during which homeowners can make payments to lower the current balance and accruing interest.
By discussing your specific requirements with a Clifton Private Finance home equity release advisor, we can help you make an informed decision regarding the available options.
Choosing the Right Pensioner Mortgage
The range of mortgages suitable for retirees allows for detailed customisation and provides a solution to match any need. Some examples of the specialist products include:
Pensioner Mortgages
|
Requirement |
SIPP-supported |
RIO |
Lifetime |
Drawdown |
HELOC |
Traditional |
|
Buying a home in retirement |
Yes |
Yes |
No |
No |
No |
With the right income profile |
|
Paying off existing interest-only mortgage |
Yes |
Yes |
Yes |
No |
No |
In some cases |
|
Expats returning to the UK |
Yes |
Yes |
No |
No |
No |
With expert support |
|
Helping a family member |
No |
Yes |
Yes |
Yes |
Yes |
No |
|
Consolidating existing debt |
No |
Yes |
Yes |
Yes |
Yes |
No |
|
Providing extra retirement funds |
No |
No |
Yes |
Yes |
Yes |
No |
Specialist Pensioner Mortgage Advice with CPF
Partnering with Clifton Private Finance gives you access to the complete UK marketplace of specialist pensioner mortgage lenders. These experienced institutions have the products and services needed to best suit your unique circumstances. Through a combination of first class advice from our dedicated mortgage team and an established relationship with qualified decision makers, CPF will open up a world of new opportunities for home finance in your retirement.
Contact CPF today to explore your options and develop a comprehensive post-retirement funding plan to suit your precise needs.
