21st October 2015
Older borrowers have been warned that using the new pension freedoms to make alternative investments or draw down money over time rather than buying an annuity could scupper their chances of qualifying for a mortgage that extends into their retirement.
In April this year, the Government brought in new rules that give retirees unprecedented flexibility over how they spend their pension savings, removing requirement that pushed many to take out an annuity.
But Mortgage Strategy magazine reports that this new freedom could create serious problems for anyone who needs to extend their mortgage term into later life.
Annuities guarantee a set income for life, which makes it easier for lenders to assess whether a borrower can afford to continue repaying a mortgage when they stop working.
As more pensioners choose drawdown options, which mean leaving their funds invested and taking out money over time, lenders may be concerned they will run out of money and default on their loans
As final salary pension schemes are being phased out, this means yet more retirees will face uncertainty over their future income and affordability calculations will become even harder for lenders.
John Charcol senior technical manager Ray Boulger told Mortgage Strategy: “One of the worst areas of market failure at the moment is lending to older borrowers. The Mortgage Market Review, which placed the emphasis on affordability, was written before the pension freedoms came in.
He said“The majority of major lenders ignore drawdown or investment income in their affordability calculations, so it could create real problems for borrowers who take advantage of the new freedoms and then need a mortgage that continues into retirement. If the pension income is something other than an annuity, most lenders will just ignore that income.
He added:“There is a fear that, if they have access to all their retirement savings, those pensioners might just blow the money on a Lamborghini. But I don’t think it is fair to assume that the majority of older borrowers would be that irresponsible. Even somebody who is earning a salary could blow their money and get into difficulties.”
Aaron Strutt of Trinity Financial, another broker, says: “Lenders will want to see what’s in the pot and if they can see that your pot is dwindling. that might cause concern when assessing your mortgage application for affordability.
“A regular income at a set amount would be much for comforting than an income that is liable to fluctuate over the years into retirement.”