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Older borrowers could be thrown a lifeline with new mortgages
Some borrowers have found themselves frozen out of the mortgage market due to their age.
by Michelle McGagh on Jan 18, 2016 at 16:03
A new breed of mortgages are expected to enter the market to help older homeowners who are having difficulty securing a new loan due to their age.
The tightening of borrowing criteria by the regulator has adversely affected older borrowers who are finding they can no longer secure a mortgage if the term runs past age 75 and in many cases 65, even if they intend to work longer and their state pension age is older than 65.
In some cases, even those who have proved their pension income can sustain a mortgage payment have had their applications turned down.
These stricter rules effectively mean those aged 55 and over have found it impossible to secure a loan.
However, with the length of working lives increasing and the state pension age rising, lenders are finally waking up to the fact that individuals will need mortgages that can be sustained into older age.
This month, Dudley Building Society scrapped the upper age limit for mortgages across its entire range in order to recognise people were working beyond 65 and able to service mortgage payments.
Jonathan Moore, head of credit at the building society, said older borrowers had been treated like ‘second class citizens by forcing them to borrow from a limited range’.
He added that ‘older borrowers are no more risky than younger ones, providing that underwriting is carried out by professional, human underwriters’.
Dean Mirfin, retirement expert at Key Retirement, said it was not defaults on mortgage payments by older borrowers that concerned lenders but afflictions such as dementia.
He noted that most people did not have a power of attorney, which allows an appointed individual to look after your financial affairs in the event you do not have the mental capacity to do so. If a borrower is diagnosed with dementia it can take a long time for the court of protection to appoint an attorney which means repayments aren’t being made.
‘Lenders are terrified of dementia,’ said Mirfin.
One lender, Vernon Building Society, is offering a discounted mortgage rate to older couples who register a lasting power of attorney ‘as a mitigant against the risk of cognitive decline’.
With a greater number of people renting longer and buying their first home at a more advanced age, the need for mortgages that push past traditional retirement ages is rising. According to the Building Societies Association the number of first-time buyers aged 25 to 34-years old has decreased between 2003 and 2014 and the number of people aged 35 to 44-years old buying their first home has increased 6%.
There has also been a 1% increase in the number of over-45s buying their first home over the same time period.
One key concern among the demographic of older borrowers is the number of people who have interest-only mortgages and no way to pay them back when the term ends. Although equity release is an option for some, others may not qualify for the traditional equity release products on offer because they do not own a sufficient amount of their home – typically two-thirds equity is needed to qualify.
Vanessa Owen, equity release expert at insurer LV=, said companies were now looking at ‘transition mortgages’ that could bridge the gap between interest-only and equity release.
‘The world is changing and we do not expect people to retire the way previous generations did and people do not think they should retire at 60, plus the employment world we now live in will facilitate [longer working lives],’ she said.
‘Lenders are now starting to focus on what transition products will look like and it is like an extension of interest-only.’
Mirfin said lenders are looking into a mortgage specifically for those with interest-only mortgages with too little equity to qualify for equity release.
The new product could be in two parts, with a roll-up interest element of equity release combined with an interest-only extension.
For example, 90% of the mortgage loan could be provided under an equity release scheme where the interest is rolled up and paid when the house is sold, say on death of the homeowner.
The remaining 10% would be an interest-only mortgage that individuals have to service for the rest of their lives.
By reducing the interest-only portion of the loan to 10% the interest the borrower would have to repay would be greatly reduced.
‘They could service the rolled-up interest (on the equity release portion meaning more of the property would be left to loved ones on death) but the 10% interest-only element would be the only interest that would have to be serviced,’ he said.
‘This reduces the risk [for the lender].’
He added: ‘Creating these products is really important…We have to look at lending into retirement or in retirement in a totally different way. You cannot treat older people like 30-year-olds…We have to look at lending to older people differently; a 70-year-old is not the same as a 30-year-old, the money is different and the behaviour is different.’
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