Mortgages and pensions

"25-year mortgages came about because 25 years was the term of most endowment plans. It had very little to do with the mortgage or any kind of financial planning by the client in regards to their needs or wants. Remember, this was back in the days when you had to basically beg your bank manager to allow you to borrow their money. You'd also most likely be having an interest-only mortgage, so the term of the mortgage had little impact on your monthly outgoings. "Thankfully, time has moved on and we are now at a place where the correct mortgage term is selected by the client and is based on their lifestyle and choices, hopefully with guidance from a professional mortgage broker. The vast majority of mortgages are now taken on a repayment basis, so the term selected now has a very real and direct impact on the monthly commitment you are taking on. It is often better to take a longer term that is easily affordable and then make voluntary overpayments, than struggle with a shorter term that leaves you with very little money to actually enjoy life. The key is to get the balance right."

This is exactly where Lifetime Mortgages can be a useful financial planning tool. We are finding more and more people have a mortgage well into their retirement with the repayment vehicle being Pension/Investment or downsizing. Borrowers in later life then find their investment has not performed well enough to cover the mortgage, they have used their pension, or they do not want to move from their beloved home A lifetime Mortgage can provide the solution to this. With no affordability assessments the client can repay their mortgage via equity release and continue to own and live in their home for the rest of their life.

"When looking at mortgage terms, an adviser takes into account the interest rate being recommended, the borrower's budget and lender's affordability assessment. We are seeing that mortgage terms are extending for some to bring the monthly payment to an affordable cost. The 25-year term that was once popular was recommended as that was the term of most endowment policies that were used to support interest-only mortgages, back in the day. Mortgage lending has evolved and most mortgages are capital and interest and do not rely on a separate repayment vehicle. This means that the term can be chosen to match requirements. We are seeing that in some areas of the country, where property prices are higher compared to income, borrowers are needing to extend their mortgage term up to 40 years to bring the monthly cost down. However, this term is reviewed with their mortgage adviser and often the term is changed when the next mortgage is arranged, or if a change of circumstances permit. It is not convention for lenders to agree a mortgage that exceeds a person's retirement age and most lenders expect a non-later-life-loan to be repaid by the borrower's retirement age or age 70, though there are exceptions to this rule."

"The undeniable truth is that house prices are too expensive, and the only way buyers can afford to purchase is by extending the mortgage term to make the monthly payment affordable. Ever-increasing numbers of people end up paying the mortgage off during their retirement, which is ok if you have sufficient pension income to satisfy the lender. Many don't. What we really need are lower house prices, not stamp duty holidays and help to buy. All they do is push prices up further, as we've just seen."

"The British obsession of paying off a mortgage by retirement is set to become a thing of the past. Why should the biggest asset that most of us will ever own not be used to ensure retired people have a more comfortable retirement? The cost of living crisis will exacerbate the move towards lifetime mortgages. Over-65s are starting to realise that rather than go without, struggle with bills and not be able to treat themselves and family members, they can use the value in their property to boost their current income."