The Mortgage Clinic: 'Can I get a home loan on my pension?'

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The Independent Online

Q. I moved out of London when I had children. Now I'm retired I want to move back in again, but I've found that property prices in London have shot up, and I can't buy the kind of house I would like in a straight swap for the one I own.

Can I get a mortgage quoting my pension as my income or is that not allowed? If not, perhaps I could persuade one of my children to extend their mortgage, give the extra money to me and I'll pay them money each month. Should I be thinking about tax allowances when I make the decision?

DF, Hertfordshire

A. There is nothing especially complicated about taking on a mortgage later in life. Not all banks and building societies will agree a mortgage based on a pension, but many will. They apply their usual criteria: do you have a big enough deposit, and can your pensions (state and private) meet their affordability or income multiple rules? If they do, you will have few problems.

Some lenders will only allow a mortgage to run to the age of 75 or 85. Unless you are close to one of those age thresholds, again this should not be a big drawback. You could simply remortgage before that time comes.

Your question suggests that affordability might be a bigger issue. But there are a couple of options. Ray Boulger, senior technical manager at mortgage brokers John Charcol, suggests that opting for an interest-only mortgage would allow you to stretch your budget further. If you were to be in a position to pay back some of the capital, pick a mortgage that allows overpayments: many do. You - or your children - could pay back the mortgage by selling the property.

"Another option could be a lifetime mortgage, where the interest rolls up," suggests Boulger. "Lifetime mortgage rates are currently fixed at around six per cent, not much more than a conventional, fixed-rate mortgage."

The debt is paid from the homeowner's estate on death, but there are some restrictions. Firstly, the debt on a lifetime mortgage doubles roughly every 12 years, making it an expensive long-term choice; lenders will usually only give a mortgage of 30 per cent of the property's value.

As to asking one of your children to extend their mortgage, Boulger counsels against it. "If you pay interest to your children, they will have to pay tax on it, but of course there is no tax relief on the mortgage interest they pay," he says.

An alternative option would be for one of the children to act as a guarantor on the parent's mortgage, or to take out a joint mortgage. Usually, the child would have to earn enough to support both their existing loan, and yours, so it is important to look into this carefully - as well as to take professional advice on the inheritance tax implications.

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