Your Industry  

Assessing the suitability of later life mortgages

This article is part of
Guide to mortgages in later life

Assessing the suitability of later life mortgages

Most of the suitability process for later life mortgages is the same as for regular deals, says Charlie Blagbrough, mortgage policy officer of the Building Societies Association.

Mr Blagbrough says affordability is assessed based on income and expenditure and the lender will also look at the borrower’s credit rating.

The lender will stress test the interest rate to ensure continued affordability when rates eventually go up, he adds.

Article continues after advert

Mr Blagbrough says some lenders are starting to use a higher rate stress test for older borrowers as they might find it more difficult to raise extra income to cover higher repayments.

However, for the portion of the loan extending into retirement, Mr Blagbrough says the affordability test is a bit different.

He says there isn’t an easy answer to what the definition of ‘retirement’ is, as it is different across lenders – some specify an age, some choose the state pension age, and others take the applicant’s stated retirement age subject to a ‘reasonableness’ test.

CML DECISION TREE IF POSS

In large part Mr Blagbrough says the way lenders assess suitability depends on how close the borrower is to drawing on their pension.

If there are still a number of decades before the borrower draws a pension, then Mr Blagbrough says it is impossible to know how large their pension pot is going to be.

For a borrower on a defined benefit pension scheme, Mr Blagbrough says much is determined by whether it is based on final salary or career average.

For those on a defined contribution pension scheme, Mr Blagbrough says the size of the pot depends on how much is paid in and how well investments perform.

He says: “The regulator recognises that lenders can’t predict the markets or even the borrower’s future behaviour - they don’t have a crystal ball and can only make a decision based on the facts in front of them on the day.

“Many lenders may be satisfied simply by checking that the borrower is making regular monthly payments into their pension pot or by looking at their latest pension forecast.

“However, if the borrower is closer to retirement age – say, within 10 years – then the lender will want to see more robust evidence of what their pension income is going to be.

“They might ask to see documents such as an annual pension statement to get an idea of what income is likely to be in retirement.

“If joint borrowers are involved, then the lender is likely to want to go into some detail about how much, if any, pension income will transfer to the surviving spouse if one borrower dies.

“The last thing lenders want is for a borrower going through a bereavement to also be left in financial difficulty.”