It’s the latest trend in Britain’s dysfunctional housing market: the rise of the mortgaged pensioner.
Higher house prices push back the age at which families buy or move up the ladder, meaning millions of borrowers now have loans that will extend into retirement.
In 2006, a quarter of new mortgages went on beyond the age of 65. Today the figure is almost 40pc. But this number is artificially low, mortgage experts say, because tough new rules introduced after the 2008-09 financial crisis limited lending to older homeowners.
There is now “enormous” pent-up demand for mortgages that stretch into borrowers’ 70s, 80s and even 90s, lenders say – and deals are becoming increasingly available.
But the profile of older borrowers is not straightforward. Some are forced to take out mortgages because they’re overstretched or, increasingly, wanting to help offspring with major expenses such as house purchases or university fees.
But others are at the opposite end of the wealth spectrum: they have ample capital and income and are borrowing as a way of protecting their estates from inheritance tax.
Older borrowers who want to raise money
Bigger initial mortgages, smaller pensions and a greater need to offer financial support to children and grandchildren mean more people require loans for longer.
“Some but not all of these borrowers are in a difficult spot,” said David Hollingworth of London & Country, the mortgage broker.
“There are some people who, for example, are reaching the end of an existing mortgage but do not have the wherewithal to repay the capital without selling up and moving. That’s a more ‘distressed’ situation.
“But there is another group of people who have ample income and who simply want to continue borrowing at low rates because they have better uses for their capital.”
For the former group, depending on their age and circumstances, rolling their conventional mortgage into an interest-only “lifetime” mortgage is an obvious route.
For example, “lifetime mortgages” fall under the umbrella term “equity release”. The borrower typically doesn’t make monthly payments at all. The interest, generally a fixed rate, rolls up and is compounded.
This interest – along with the original capital sum – is repaid when the borrower sells their home to move into care, for example, or on death. Fixed lifetime mortgage rates are higher than standard mortgage rates, mainly because the lender is taking a risk on the unknown length of the mortgage term.
For borrowers with adequate income, you could opt to pay the interest as you go to keep down the eventual bill.
A new mortgage from Shawbrook allows over-55s to extend existing interest-only arrangements for up to 15 years with a range of rate options including an initial five-year fixed rate of 6pc.
This is expensive, however, and borrowers might do better. Hodge Lifetime offers a mortgage aimed at borrowers aged 55 or over. It’s available on an interest-only basis and can be taken up to a maximum age of 95. The rates are not fixed for the life of the loan. Instead, borrowers pay a two-year fixed rate of 3.1pc or a five-year fixed rate at 3.3pc. After that, variable rates apply – leaving borrowers at risk of rate increases and a hit on their income.
This type of deal might also suit wealthier borrowers seeking to avoid death duties (see below).
For the latter group, those who have ample income and simply need to extend their mortgage, cheaper options may be available in the form of conventional mortgages with older lending limits.
Here, it is a normal repayment loan where, at the end of the term, you expect to own the property debt‑free. A growing number of mainstream lenders are prepared to push up the age limits. Jonathan Harris, of broker Anderson Harris, pointed out that Nationwide would lend to age 85 and Halifax to 90. “Santander and HSBC will lend to 75 and NatWest to 70,” he said. But he pointed out that lenders had differing requirements relating to borrowers’ income.
“Santander will lend on earned income alone, rather than pension or investment income,” he said. “So this can be good for borrowers in their 50s but perhaps not beyond.” Mr Hollingworth said: “Smaller building societies can be more flexible. Bath Building Society doesn’t have a specified maximum age and can consider cases on their merits.
“Family Building Society can consider older borrowers case-by-case and could offer a term up to age 89.”
Older borrowers looking to reduce inheritance tax
While larger later-life mortgages are a function of rising house prices, older homeowners face another problem: their valuable property might mean inheritance tax will be liable on their estate.
One way to reduce this tax – charged at 40pc on the surplus above the threshold, currently £650,000 per couple but set to rise marginally next month – is to borrow against the property, raising capital to give to family members.
Provided the borrower survives seven years after this gift, the money falls outside the estate for tax purposes. This manoeuvre works only when the cost of the mortgage remains below the inheritance tax that would otherwise be due.
Inheritance Tax Calculator
Lower lifetime mortgage rates, with some under 5pc, make this more feasible. Where the borrower (or their children) have sufficient income, they can pay the interest as they go to reduce the size of the ultimate mortgage bill at death.
Mr Harris said: “Aviva, Legal & General and Hodge will allow the interest to be paid on a monthly basis, which helps slow down the compounding effect,” he said. “In many instances we find these payments are made by children or even grandchildren.”