Banks increase age limits for mortgage borrowing

The good news is that the situation has been improving of late with a number of larger banks and building societies increasing the age by which the mortgage has to be paid off by. Nationwide raised its maximum age limit to 85 in May, while soon afterwards Halifax extended its age limit to 80. Other lenders such as Santander and HSBC will lend to age 75, while RBS will lend up to 70.

Mortgage advisers should be aware that some smaller building societies in particular are excellent at lending to older borrowers as underwriting is usually completed by human beings rather than computers. Family, Dudley and Cambridge building societies, for example, actively promote lending to older borrowers. However, it is worth noting that some of the smaller building societies prefer not to lend outside their region, so only local borrowers will benefit from their flexible policy on lending up to or into retirement.

The fact lenders are being more flexible on maximum ages is encouraging although borrowers still have to prove affordability, and many older clients will need to do this out of retirement income, which can be tricky. But the advantage of being able to take out a standard residential mortgage, as opposed to equity release, is that rates are generally cheaper although the loan does eventually need to be paid off whereas this is not the case with a lifetime mortgage. Therefore affordability and how the mortgage will eventually be repaid has to be taken into account in a much more thorough way than with a lifetime mortgage.

Table: Lending for older borrowers

Lender            Maximum lending age

Accord            75

Barclays         70

Clydesdale     75

Halifax            80

Lloyds             75

Metro              80

Nationwide     85

RBS               70

Santander      75

Virgin Money  75

Source: Anderson Harris

Equity release may be an option for those who can not get a standard residential deal because they are asset-rich, cash/income poor and can not afford the mortgage repayments. The equity release requests that have crossed my desk include a couple in their 70s who required the funds to extend the lease on their Mayfair apartment, for example. Another elderly couple needed to remortgage as they no longer ticked the Mortgage Market Review boxes when their mortgage with a private bank came up for renewal. And another couple in their 80s wanted to explore releasing money to gift to children for their grandchildren’s school fees.

While rates on equity release have been high in the past, low interest rates and increased competition mean they now look more competitive. Nationwide announced earlier this year that it is exploring entering the equity release market, with group retail director Chris Rhodes saying the product would likely feature ‘a decent fixed interest rate without access charges or penalties’, and a no-negative equity guarantee, meaning that people’s homes would not be repossessed.  

This would be extremely welcome as most products do carry early repayment charges, and they tend to be high as they are fixed at the outset or linked to gilts.

Loan-to-values tend to be low, with somebody who is aged 70 generally able to borrow around 40 per cent of the value of their home, while someone aged 80 can usually borrow around 50 per cent. Some lenders may consider lending slightly more or offer a slightly cheaper rate if the applicant has an illness that may reduce their life expectancy.

Rates for equity release have reduced significantly in line with long-term gilts; for example Legal & General reduced its low loan-to-vale (LTV) standard rate to 4.5 per cent monthly equivalent rate (MER) on 4 August; by the middle of that month, it had fallen again to 4.24 per cent MER. By the end of August the rate had been cut to 3.82 per cent MER and it is now 3.65 per cent.

For larger loans the cheapest rate is with Legal & General. The loan amount has to be £250,000 plus, and the rate is 3.47 per cent MER with a fee of £1,999.

Equity release rates always used to be fixed, but there are now some variable rate options. For example, One Family has a variable rate from 3 per cent annual equivalent rate, which increases in line with consumer prices index. Some equity release lenders will offer a reserve, so the applicant can draw down an initial lump sum and then draw more later. The advantage of this is that the borrower will only pay interest on the amount drawn – not the amount in reserve. However, the reserve will always be at the prevailing rate of interest.

The big issue with equity release is the compounding effect of rolling up the interest. This has earned the sector a lot of bad press over the years as it can be expensive. A £250,000 lifetime mortgage taken out by a 65-year-old at a fixed rate of 3.47 per cent would compound up to a total debt of £353,500 by the time the borrower dies, for example, 10 years later aged 75 or £420,500 at the end of 15 years.

However, Aviva, L&G and Hodge all allow the interest to be paid on a monthly basis, which helps to slow down the compounding effect. In many instances we are finding that these interest payments are made by children or even grandchildren who have the income to cover these outgoings.

One advantage of equity release is that the set up costs are relatively low. Arrangement fees are usually quite cheap with some lenders not charging them. Many lenders offer free valuations through equity release packager clubs. 

Brokers are being called upon more than ever before to advise on later life lending, but equity release is a highly specialist area. Ideally, advisers should be able to consider conventional mortgages as well as equity release as the latter is not always the best option and tends to be more expensive than a conventional mortgage. Financial advisers should be aware of equity release and have a qualification that enables them to advise in this area. 

Specialist training is required because advising a lifetime mortgage solution is usually a far more time-consuming process than advising on a regular mortgage. The client would usually be classed as ‘vulnerable’ due to their age, so to recommend a lifetime mortgage a great deal of fact finding is required. The decision to apply for a lifetime mortgage is often a ‘family decision’ and the borrower’s children or family members may often be involved in the advice process so that all potential solutions can be considered. The borrower should also take independent legal advice before proceeding with an equity release mortgage. 

Demand for later-life lending is increasing, whether it be for a conventional mortgage into retirement or equity release, and the offerings are becoming more competitive. An equity release mortgage is a big decision for anyone, and even though it is not a cheap solution, it can still be the right one for certain clients.

Adrian Anderson is a director of Anderson Harris

Key points

A number of larger banks and building societies are increasing the age by which a mortgage has to be paid off.

Equity release may be an option for those who can not get a standard residential deal because they are asset rich, cash/income poor.

One advantage of equity release is that set-up costs are relatively low.