Ashley Pearson, Head of Intermediaries at Loughborough Building Society
The retirement landscape in the UK is undergoing significant change.
People are living and working longer than ever before, with socioeconomic factors such as the average age at which many people now buy a house and have children all playing a major role in this shifting dynamic.
Rising house prices over the last few decades have seen the average age of first-time buyers increase to 34 years old, according to the Office for National Statistics (ONS), with the knock-on effect being that many people are entering their 50s, 60s and 70s still carrying mortgage debt.
Similarly, a growing number of the population are choosing to start a family later in life, which means many people are now entering what has traditionally been considered their retirement years with ongoing family commitments such as childcare fees.
This is having a major impact on how consumers plan for, and live through, their retirement years, with the days of working for several decades and retiring at the age of 60 a thing of the past for many. Similarly, advancements in science mean people are now living longer, healthier lives and spending a greater amount of time in retirement and in the workforce.
Yet despite these shifting social dynamics, the mortgage market has been slow to respond to the changing needs of this demographic, with many product offerings failing to take into account the increasing demand for solutions that cater for these changing needs.
Adapting to the times
This is particularly true for those borrowers in their pre-retirement years, who, despite being healthy and able to work, face difficulty trying to secure a mortgage after the age of 55.
In many of these cases, these borrowers have been declined a mortgage on the high street due to their age.
However, we continue to experience growing demand for this type of borrowing, with some of these individuals looking to downsize to a smaller property, while others still want or need to continue working to finance their mortgage, lifestyle and family commitments.
As our lending criteria have no upper age limit, these clients have been successful in securing an interest-only mortgage, as this option can be taken out for up to 35 years regardless of the client’s age at the time of application.
For example, this means that pre-retirees looking to downsize can use the sale of their property to secure an interest-only mortgage with a maximum loan to value (LTV) of 60 per cent, provided they have a minimum amount of equity in the mortgaged property. This ranges from £500,000 in London and £350,000 in the South East and South West to £225,000 in the Midlands and Wales and £200,000 in the North.
There is also the opportunity to combine this with a capital repayment option of up to 80 per cent LTV, subject to the client meeting the minimum equity requirements. In this case, the 60 per cent LTV limit will still apply on the interest-only part of the loan.
Income multiples of up to five-and-a-half times income and loan amounts of up to £750,000 are also available on interest-only mortgages, enabling borrowers to tap into a substantial amount of equity that may have been built up in the property over the longer term.
In cases where the property is the applicant’s main residential home, interest-only is available up to 75 per cent LTV, with any lending above this limit available on a capital and interest repayment basis only.
If the client does not have enough equity in the property, they can use a percentage of their pension fund – for example, 25 per cent of a £300,000 pension fund (£75,000) – as a repayment vehicle, enabling them to take out an interest-only mortgage of up to £75,000.
All these options demonstrate the growing flexibility required to support this growing demographic who, though approaching the traditional age of retirement, are not in a position to leave the workforce, remain undecided about the future or want to continue working for the foreseeable future.
And being aware of these options could result in more clients being able to continue working towards their retirement goals while simultaneously earning an income that will help to boost their retirement fund when they are ready to leave the workforce.