According to a survey of Mortgage Brokers by the Nottingham Building Society, almost half said that they had experienced a rise in turned down mortgage applications from customers in their 40’s and above. When the customers were asked why they were rejected, they were told it was because of their age.
To understand why some of these applicants feel the way they do, we first need to reflect on the days before computerised credit scoring and increased regulation.
If you were to go into your local building society to discuss your mortgage options, you’d likely be interviewed by the branch manager or a Mortgage Advisor in Liverpool. They would individually assess your personal details, including how well your current account is conducted, before deciding whether or not your application can be approved.
If you were considered lucky enough to get an approval, you would then be advised on how much you could borrow. This was expressed as simply a multiple of your gross salary.
So, if you were earning £20,000 per annum and the lender’s income multiple was 3.5x, then you’d be allowed up to a £70,000 mortgage.
The one thing this income multiple failed to take into account was age. No matter if you were 30 or 50, you would be allowed to borrow the same amount of money. Sounds quite fair and non-ageist doesn’t it?
Perhaps on the surface, but if those 2 applicants were both due to retire at 65, then the younger applicant would be granted a 35-year mortgage term, whilst the older applicant would only be granted 15 years, thus making their mortgage payments much higher.
Take the above figure of £70,000 (capital and interest) and use that as an example, using an interest rate of 5%. Over 35 years, the younger applicant would approximately be paying £252 per calendar month, whilst the older applicant would be £395 per calendar month over their 15-year term.
It’s the same amount in the end but leaves one worse off financially than the other due to age and circumstance. If interest rates shot up, then there’s a higher risk of an arrears situation occurring for the older applicant, whilst the younger one has a lower risk.
It’s reasons like this as to why modern mortgage calculators now consider your age, income and expenditure.
Because of their age, older customers are being told that they can’t borrow as much as they were hoping to. Slightly ironic considering we’re surrounded by a constant reminder from the government that the pension age is on the rise. The banks don’t seem to be taking this into account either when granting mortgages. Let’s explore this further.
There are some manual labour jobs that you wouldn’t physically be able to work into your 70’s and beyond. Lenders are also closely monitored by the Regulator when it comes to repossessions and arrears cases.
When these occur, it makes the lender look really bad. It’s also an expensive process that attracts bad press. You can be certain they don’t want to be seen kicking a little old person out of their family home because they couldn’t afford their payments.
There is some good news though, and that is that a lender will consider granting mortgage past regular retirement ages. This, however, is only if you can demonstrate affordability post-retirement, usually with a letter from your pension provider with a projection of your future income.
A potential issue here is that almost everyone reading this will likely take some form of a reduction in their income at retirement. Therefore, lenders will need you to prove that you are capable of affording your mortgage from that reduced income.
In practice, this doesn’t often work unless you only require a very minimal mortgage. The latter probably means you wouldn’t need to stretch it past retirement anyway.
You may possibly remember that the default retirement age was scrapped back in 2011, meaning employers can no longer force you to retire. Because of this, whilst some lenders still use state retirement age as the age that you must have your mortgage paid off, it has become common for them to let you self-declare the age you intend to retire.
This comes with plausibility checks though. For example, you’re a fire-fighter declaring an intended retirement age of 72, it would likely be knocked back.
If you find yourself in this position, you must prepare yourself for being questioned on how you will afford your mortgage in later years. The consumer protections and regulations are in place to protect the consumers and aim to encourage careful lending.
If you need the mortgage term to run past the normal state retirement age, you will need to demonstrate how you will be able to sustain your mortgage payments, providing proof if requested.