Middle-aged borrowers facing problems taking out mortgages

New lending rules affecting those in their forties and fifties are a 'major challenge'

New mortgage affordability rules mean lenders are now taking into account post-retirement income before agreeing to a mortgage term ending beyond the borrower’s retirement date.

Even those in their forties and fifties with equity and a good income must meet these additional requirements.

Figures from the Mortgage Advice Bureau show that lenders are increasingly specifying maximum age limits for mortgages, while Nationwide now requires borrowers who ask for their loan to run into their retirement to have a private pension.

"The new affordability rules are creating a collision between borrowers’ desire to stretch their repayment terms beyond their normal retirement age, and the requirement for lenders to carry out income-based checks to ensure that consumers can afford to repay their loans," said Brian Murphy, Head of Lending at the Mortgage Advice Bureau.

"Borrowers often seek longer repayment terms to reduce their monthly repayments and keep them as a manageable portion of their overall expenditure. However, if that term crosses over from their working life into retirement, there is still a regulatory imperative for lenders to ensure that affordability will not be compromised when regular employment income comes to an end.

"Many lenders also have a maximum cut-off age for borrowers at the end of their mortgage term, which averaged 72 across the market in June. The result is that some borrowers are left with a limited window in which to repay their mortgage, especially as housing pressures and delayed homeownership can mean people taking on a loan later in life than once was the norm."

According to MAB figures, one in five buyer searches online specified a mortgage term of 30 years or longer. Spreading the cost of a mortgage over a longer period can help satisfy lenders that customers can afford monthly repayments and over a 30 or 35 year term can reduce monthly payments by more than £100 compared with the typical 25 year term, depending on the interest rate. But it also pushes up the total cost over the lifetime of the loan, potentially adding tens of thousands to the total amount a borrower has to repay.

"Lenders are increasingly concerned as to how mortgages are going to be repaid," said Adrian Anderson, director of mortgage broker Anderson Harris, "and have particular worries about those borrowers taking on interest-only mortgages who don't have any plans in place to pay off the loan. It is harder for older applicants to get a mortgage with many lenders insisting the loan is paid off by the age of 65 or 70, depending on their criteria.

"Increasingly since Mortgage Market Review, many lenders are using 65 as the applicant's retirement age which makes little sense when the state retirement age is rising and most people will work on beyond this age.

"Given that the average age of a first-time buyer is their mid-30s, by the time many have saved up for a deposit there is not enough time to pay the mortgage back by the time they reach retirement age. Stretching the term to reduce the payments and help with affordability is not an option either. Some lenders are more flexible than others with regard to when a mortgage is paid off so if you are in an occupation where you are intending to work until you are 70, some lenders will consider this."

Brian Murphy added: "Tallying all these needs is one of the major challenges facing the mortgage market, and we are certain to see more flexibilities and new, innovative products emerging to bridge this gap. There is a real need to recognise that people are living and working longer, and we understand that efforts are in progress to explore ways to permit borrowing into retirement without turning a blind eye to affordability."