Lending Into Retirement – A New look at underwriting

Dear Lenders With your recent changes in criteria for residential interest only mortgages, which has had the effect of forcing the majority of borrowers into a repayment mortgage, which results in higher monthly mortgage costs please spare a thought for our cash strapped home buyers and home owners who liked the freedom of choice when looking for an interest on mortgage. The only option available now to the historic interest only borrower, to try to keep their mortgage costs within their desired budget, is to consider extending their repayment mortgage term past the perceived retirement age of 65 to say 70. This increase in the mortgage term of 5 years can mean the difference in making the monthly mortgage payment more comfortable and affordable – A £100,000 repayment mortgage at 4% is £134 per month cheaper on a 20 year mortgage term compared to a 15 year term. Why is it then that most of you place even more barriers to lending when extending the mortgage term past the age of 65 – even though you know that all economic indicators point to the fact we will be working longer and retiring later? The hurdles you put in front of our borrowers usually come in the guise of need proof of your income and, of course, you expect this income, usually a pension, to satisfy the initial loan amount. An example: It is understandable that an applicant at age 50 needs a joint provable income of £40,000 to obtain a loan of £160,000 on a 15 year repayment mortgage. However, why is it that you still expect them to show you the same proof of income in retirement of £40,000 if all they wanted to do was to extend the mortgage term for five years so that the mortgage now ends at the age of 70, allowing them a more affordable monthly amount? What about considering the following novel and common sense approach to lending past retirement which simply makes sense? Based on the example above, If our clients want a mortgage until the age of 70 and as your criteria dictates this mortgage loan has to be on a repayment basis why don-t you consider the following: At the age of 65 and after 15 years of repayment the outstanding mortgage balance will be in the region of £56,500 with a further 5 year term left remaining. If the mortgage balance is £56,500 at the age of 65 why is there the need for proof of income to satisfy the initial whole loan of £160,000? Why not, ask for provable pensionable income of £14,125 per year which is still a conservative 4 x income (or whatever your income/affordability calculator states that income must be to substantiate a loan of £56,500). This is a common sense way of thinking, it will allow borrowers to take a repayment mortgage over a slightly longer term whilst providing acceptable proof of income for you to quantify to your regulators that you still adhere to a sensible lending policy – It’s a win/win situation for all concerned. Yours sincerely Darren Pescod Managing Director The Mortgage Broker Ltd