At last some serious innovation in mortgages for mature borrowers
Posted on 14 June 2016 by
John Charcol is one of a small number of mortgage brokers piloting a ground breaking new mortgage from the Hodge Lifetime Group – the 55+ mortgage.
One of the worst cases of market failure following the 2008 banking crisis was the death of mortgages for older borrowers. This resulted from both lender and regulatory failure, although obviously the two are linked.
We are now seeing some improvement in the situation, with several of the smaller building societies leading the way in terms of extending the maximum age to which they will lend. Halifax and Nationwide have half-heartedly followed suit by announcing an extension of their maximum age for some borrowers to 80 and 85 respectively.
However, criteria improvements usually come in small steps and so these enhancements are a welcome change in the post 2008 direction of travel. These announcements from two major lenders should encourage others, as well as regulators, to consider how they should engage in their own journey of responding to the realities of life in a world where statutory retirement age has been abolished and individuals progressively respond to the opportunities provided by new pension freedoms.
Nevertheless it has fallen to a small lender previously only operating in the Lifetime Mortgage market (also known as equity release) to launch a mainstream mortgage with really innovative criteria for income assessment as well as maximum age.
The 55+ mortgage from Hodge Lifetime has a maximum age at the end of the mortgage term of 95 and, contrary to the norm on the mainstream market, but normal in the lifetime mortgage market, this is based on the youngest borrower on a joint application.
The types of income acceptable for the affordability assessment, plus the fact that affordability is calculated on an interest only basis, makes this mortgage a much more viable option for many older borrowers, whether they want to borrow for a relatively short term or are looking for a long term solution.
As well as accepting earned income up to age 70, similar to most lenders, Hodge will go beyond that for those applicants who plausibly state that they plan to work to a later age. Depending on occupation and underwriter discretion they will consider this source of income up to age 80.
Naturally pension income is accepted, both in payment and expected future entitlement, but the innovation is how income is treated for those in drawdown and/or with unvested defined contribution pension(s) or other investments.
Our experience is that for clients in drawdown lenders really struggle to assess income, bearing in mind that the point of drawdown is to have flexibility on how much income one draws. However, Hodge has devised a straightforward and easy to understand basis. It looks at the level of sustainable income that could be drawn, taking account of the borrower’s age. For those up to the age of 70 it calculates this at 5% p.a. of fund value and for those over 70 at 7% p.a.
Taking this innovative approach a stage further it will use the same basis to calculate income available from collective investments (including cash ISAs, which some lenders ignore) and any net rental income, although depending on the type of investment only 50-75% of the calculated income is used for the affordability calculation.
With the recent changes in pension legislation and introduction of the lifetime ISA it is likely that people will increasingly retire gradually, as I am doing, and use a much wider range of assets to provide an income in retirement. Lenders have been slow, in fact tortoise like, to respond to changes in how people fund their retirement but Hodge has come up with a sensible solution for assessing affordability.
Its approach means that borrowers choosing to take less income from their retirement savings than would be possible are not penalized by the lender reducing the maximum loan it considers is affordable.
This sensible approach actually also enhances the lender’s position by allowing the borrower to manage their retirement savings in a tax efficient way. As the borrower is not forced to take more income from their investments than they need or want, just to prove to the lender they currently have enough income to satisfy the lender’s affordability calculation, more assets will remain invested.
Affordability is calculated on an interest only basis, stressed at 8.5%, and a first death stress test is applied if the loan matures after the older borrower’s 75th birthday. In this event the loan must remain affordable based on the income of the survivor after the death of the other borrower.
It is worth noting that the higher the proportion of income derived from assets other than pensions, unless, unusually, both have similar pensions, the less of an issue this will be, assuming each borrower has made a will and leaves any investments in their sole name to the survivor.
By calculating affordability on an interest only basis Hodge does not discriminate against those wanting only a short term mortgage. It is not unusual for borrowers close to retirement, but coming to the end of their existing mortgage term, to want a remortgage for, say, just 10 years, as they plan to move, possibly trading down, when they retire, but want flexibility on when to do so.
Even lenders that offer interest only often still calculate affordability on a repayment basis, which means that in their eyes, even when a mortgage is eminently affordable on an interest only basis, it is deemed not affordable as the assessment is based on monthly repayments on, say, a 10 year repayment mortgage.
Clearly, on an interest only basis, monthly payments are the same regardless of term. All Hodge 55+ mortgages, in line with most lenders, allow 10% p.a. ERC overpayments during a deal period and so those who to want to overpay are able to do so. It is a simple computer calculation for us to advise the level of monthly overpayment a borrower should make if they want to repay the mortgage by a set date.
A major criteria problem for many potential interest only residential mortgage borrowers when sale of the mortgage property is the repayment strategy (a strategy not all lenders accept) is the requirement for minimum equity of £150,000 - £300,000. Hodge also imposes this restriction, albeit at the lower end of this range with a minimum £150,000 equity required, although it can be aggregated with other assets such as investments and equity in other UK properties.
However, although the regulatory rationale for insisting on minimum equity is that borrowers should have enough equity to have the option of selling and downsizing this would not be necessary if a mortgage was designed to see out the borrower’s life but was nevertheless treated as a mainstream, i.e. not lifetime, mortgage for regulatory purposes.
Hodge hasn’t quite got there with a maximum age of 95, although mortality statistics suggest that the majority of its borrowers will not reach that age. Thus the obvious next step from either Hodge or another lender prepared to help borrowers with less than £150,000 equity is to extend the maximum age far enough for advisers to be comfortable the mortgage would outlive the borrower(s).
This would avoid the need for the lender to impose any specific amount of equity, but allow the amount to be effectively dictated by the maximum LTV, which I would expect to limited to the 60 – 70% range. By specifying any minimum cash amount of equity lenders’ criteria massively discriminates against people living in certain regions of the UK. After all, there are areas where many homes are valued at less than even the minimum £150,000 equity required by lenders.
The minimum age to apply for the Hodge 55+ plus mortgage is, not surprisingly, 55, with a maximum of 85, which apply to both borrowers on a joint application. The maximum LTV is 60% and the maximum loan size is £500,000, subject to, as mentioned above, minimum equity of £150,000.
The arrangement fee is £995 and on remortgages there is a free valuation for properties worth up to £350,000 (for properties worth more the fee is reduced by the cost of a valuation at £350,000, which is £262) and free legal fees.
Interest rate options are similar to other mainstream mortgages, albeit initially with a limited choice. Current rate options are:
• 2 year fix: 3.49%
• 5 year fix: 3.95%
• 2 year discount: 3.30% (0.9% discount off 4.2% SVR).
Leasehold properties must have at least 90 years remaining on the lease at the start of the mortgage and the mortgage is available for purchase or remortgage of a main residence only in England and Wales.
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The blog postings on this site solely reflect the personal views of the authors and do not necessarily represent the views, positions, strategies or opinions of John Charcol. All comments are made in good faith, and neither Charcol Limited nor Ray Boulger will accept liability for them.