Interactive Investor

Retirees squeezed as 80% of over-55s refused loans

10th August 2020 15:53

Liz Bury from interactive investor

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Older homeowners are struggling to find home loans and many are ending up paying high rates as mortgage prisoners.

Retirement credit has become a minefield over the past year, as 83% of the over-55s have been unable to remortgage, research shows.

Just 17% of applications by over 55s were accepted by lenders during the past 12 months, according to broker Retirement Mortgage Service.

The company says only 438 out of 2,540 retired homeowners were able to refinance onto another mortgage. The rest were unable to qualify for any standard mortgage, retirement interest-only mortgage or equity release.

That means their only option is to stay with their existing lenders and fall onto their standard variable rate tariffs, which can be as high as 7%. This group are known as mortgage prisoners.

The reasons for the rejections are lenders’ tough affordability rules, which penalise older homeowners. 

Many do not accept pension cash when working out if a consumer is able to repay a loan, meaning retirees can appear to have a huge drop in income.

Steve Wilkie, executive chairman of RMS and Responsible Life says a side effect of pensions freedoms has hamstrung many older people who want to remortgage.

These rules let those with DC pensions easily take out lump sums as cash, known as drawdown, rather than the previous norm of buying an annuity and getting guaranteed income for life.

But lenders often do not allow drawdown cash to be used to repay mortgages, unlike annuities.

Other banks take a dim view of relying on the income from a surviving spouse when the other dies, even if that is enough to pay off the loan.

Many lenders also reject other forms of income also preferred by retirees, such as taking in a lodger, rental income or investment returns.

Steve Wilkie, executive chairman of RMS and Responsible Life, says:

“Retirees are being frozen out of the mortgage market because they are being sabotaged by affordability rules that are not fit for purpose.”

He believes lenders are overreacting to a very small problem.

He adds:

“The risk in mortgage lending for the banks is at high loan-to-values, but our customers want to borrow 40% - there’s not a huge amount of risk.”

Almost all mortgage lenders also have age caps on how old a homeowner can be when a loan ends. 

As mortgagors get close to this age cap they can find home loans become unaffordable as they have fewer years to repay the loan.

The issue is especially acute for interest-only mortgage holders who are coming to the end of their loan terms with no repayment plan in place.

One in nine of these is over 65, and have only been paying off the interest on their mortgage but not building up equity in the home.

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