Older borrowers who take advantage of the new pension freedoms and choose not to opt for an annuity could find it even harder to qualify for a mortgage into retirement, brokers have warned.
In April this year, the Government introduced unprecedented flexibility over how retirees could use their pension pots, removing a framework that had effectively forced many in the past to take out an annuity.
Annuities guarantee a set income for life, which makes them easier to handle for lenders that are looking at whether a borrower can afford to continue repaying a mortgage.
As more pensioners opt for drawdown, which means leaving their money invested and taking out cash gradually over time, lenders have less certainty about their income, presenting a greater risk that they may not be able to keep up payments. With more employers phasing out final salary pension schemes, which also provide retirees with a guaranteed income, the affordability calculations for older borrowers are likely to become even more complicated and unpredictable for lenders.
John Charcol senior technical manager Ray Boulger says: “One of the worst areas of market failure at the moment is lending to older borrowers. The MMR, which placed the emphasis on affordability, was written before the pension freedoms came in.
“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.
“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.”
Prolific Mortgage Finance managing director Lea Karasavvas agrees. He says: “Most lenders will require an evidence of pension income if you want to go beyond retirement on your residential mortgage, so it is a problem.
“The new freedoms have led to many people deciding to cash in their pensions at the earliest opportunity and use high-yielding rental properties as an alternative. But using this to support a residential mortgage application will simply not work due to the risk of rental voids.
“The result could be that lenders have higher retention of their existing client bank through borrowers’ inability to leave. Those who can leave will have limited choice. This is where lenders such as Santander that take clients to age 75 win, and where mutuals such as National Counties are also seeing an increase in their market share.”