Getting a mortgage when over 40 – an impossible dream?

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Dec 09, 2014 by James

The hopes of many people hoping to step onto the housing ladder have taken another bashing in recent weeks. As if the prohibitive level of house prices and the difficulties of securing a mortgage in a post-recession UK were not enough, now new regulations and the freedom of over-55s to unlock their pension savings seem to have frightened mortgage lenders into some seriously defensive action.

In April 2014, the Financial Conduct Authority demanded that banks make rigorous checks to ensure that all mortgage borrowers are able to make and maintain their repayments. This restriction has been compounded by the fact that over-55 are now allowed to take money out of their pension savings, meaning that whereas in the past mortgage lenders might have been able to lend on the basis of pension cash, they can no longer be sure that it will be available.

 

Effects

What are the effects of these changes on would-be mortgage holders? One of the key outcomes has been to make it much more difficult for older borrowers – in particular those whose proposed mortgage term would not have expired by the time they retire – to get a mortgage.

This is a problem for several reasons. The first is that the average term of a mortgage has been lengthening for several years now. In 2007, less than a third of all first time buyers took out a mortgage for a period longer than 25 years, whereas in 2013, half of them did. An extended mortgage period reduces the size of monthly repayments but, clearly, is more likely to require the borrower to continue paying even when they have retired. For example, a 45 year old taking out a 25 year mortgage would still be paying until they were 70, as would a 35 year old securing a 35 year term.

Another issue is that in the UK, it is becoming increasingly common for people to seek mortgages at a later age. The price of housing means that many have to spend years increasing their income and saving a deposit before they can buy, while relationship breakdowns, drops in income and other changes lead thousands to seek new homes – and new finance for those homes - every year.

 

Solutions

There are a few potential solutions to this problem. The most obvious is for borrowers to take out a mortgage with a relatively short term that expires before they reach retirement age. This will mean higher monthly repayments than with a longer-term loan, but it does solve the problem. Having a decent sized deposit is also helpful, since that decreases the amount payable per month, and can encourage lenders to offer a better interest rate, cutting the cost still further even on shorter term deals.

This situation is also a good reason to consult an independent broker or mortgage advisor with a view to finding a deal, rather than going directly to a particular bank. A broker who is free to explore the whole of the market is in a much better position to find the best deal for the individual, and to weigh up all the options.