Mortgages on a pension
Most pensioners always wonder if they can get a mortgage on a pension. What mortgage affordability requirements they will need to meet to get a mortgage on a pension and how they can improve their chances by accurately displaying their income to the mortgage lender.
With the number of people aged over100 in the UK rising by 72% over the past decade, we are certainly living longer and many of us may want to get a mortgage on our pensions.
In this brief guide, we will discuss if you can get a mortgage on a pension, what to consider if you want to get a mortgage on a pension and how to go about getting a mortgage on a pension.
Can I get a mortgage on a pension?
The short answer is yes, you can get a mortgage on a pension but you may find that most standard residential mortgage lenders may not be willing to lend to you if you are on a pension
Most mortgage lenders prefer to lend to borrowers who will be younger than 75 when the mortgage term ends or would still be unretired when the mortgage term ends.
There are still many specialist mortgage lenders who will consider lending to borrowers who are on a pension and borrowers who will be more than 75 when the mortgage term ends.
Some mortgage lenders do not have any minimum age requirement and will lend to borrowers way beyond 90 by the time the mortgage term comes to an end as long as the borrowers can prove that they can continue to make their mortgage repayments when they are on their pension and even after.
You can certainly use your pension income to pay off your mortgage.
Can I get an interest-only pension mortgage?
Yes, you may be able to get an interest-only pension mortgage if you meet the mortgage eligibility requirements.
With an interest-only pension mortgage, you will benefit from lower monthly repayments as your monthly mortgage repayments will be made up of interest only.
This means you will need to have a capital repayment plan which the mortgage lender will approve before giving you an interest-only pension mortgage. This is known as an interest-only pension mortgage repayment vehicle and can be equity from another property, your investments, your savings, shares or bonds.
You can also use the 25% tax-free lump sum which you can extract from your pension as your repayment plan for your interest-only pension mortgage.
Interest-only pension mortgage rates will vary across different mortgage lenders. If you want to get an interest-only pension mortgage then you may want to speak to a specialist mortgage broker who may be able to assist you further.
Advantages of an interest-only pension mortgage
- Your pension contributions may benefit up to 40% tax relief for higher rate taxpayers.
Disadvantages of an interest-only pension mortgage
- You have to pay off the balance at the end of the interest-only mortgage term
- The lump-sum cannot be used for any other purpose but to pay off your interest-only pension mortgage so you may want to ensure that your pension contributions are sufficient to sustain your standard of living.
- If your pension fund performs poorly you could find yourself in a serious financial situation with no way of paying the balance on the interest-only pension mortgage.
How many years can you get a mortgage on a pension for?
Usually mortgages on pensions used to be offered for 25 years but these days it is all based around your mortgage affordability. If the mortgage lender thinks you can continue making the monthly mortgage repayments far beyond 25 years and you ask for a longer-term mortgage on a pension then you may well be able to get mortgage terms reaching 35 years.
What to consider when getting a mortgage on a pension?
There are several factors to consider when trying to get a mortgage on a pension.
We will cover the main points below.
Your age is the key factor. As mentioned above many mortgage lenders will not lend to borrowers who will be approaching 75 at the end of the mortgage term.
There are however specialist mortgage lenders who may be able to provide a mortgage on a pension to borrowers who will be beyond 75 at the end of the mortgage term.
Your income will be a major factor when a lender decides if they will give you a mortgage on a pension.
If your income is solely derived from your pension then it may be harder to get a mortgage on a pension but if your income is derived from other sources too including your pension then you may find it much easier to get a mortgage on a pension.
Will I be able to use any supplementary income for a mortgage on a pension?
Mortgage lenders don’t all accept supplementary income but those who do may only accept a percentage of it rather than all of the supplementary income.
If most of your earnings as a single person are of supplementary income then you may need to find a mortgage lender who is willing to lend you the amount you are after and also accept most of your supplementary income so you can get a mortgage on a pension
Some mortgage lenders may also accept benefits whilst some will not accept benefits. If benefits play a significant stake in your income then you will want to find a mortgage lender who accepts a huger percentile of benefits as income.
When considering a mortgage on a pension, Supplementary income could include:
Overseas earned income
- Attendance Allowance benefit
- Carer’s Allowance benefit
- Child Benefit
- Child Tax Credit benefit
- Disability Living Allowance (DLA)
- Incapacity Benefit (IB)
- Industrial Injuries Benefit (IIB)
- Maternity Allowance benefit
- Pension Credit benefit
- Severe Disablement Allowance
- Widow’s Pension benefit
- Working tax credit benefit
Can you get a mortgage on a pension with bad credit?
Getting a mortgage on a pension with bad credit may be difficult as mortgage lenders may usually want to lend to borrowers who have a good credit score and have shown a good repayment history on all their previous debts and credit obligations.
There are however mortgage lenders who will offer a mortgage on a pension to a borrower depending on what type of bad credit was and what the circumstances were when they accrued the bad credit
If it was a CCJ which was satisfied and is a certain age then some mortgage lenders may be willing to lend. Other mortgage lenders may lend if the CCJ was a certain amount.
When looking to get a mortgage with bad credit the requirements from different mortgage lenders will differ and a bad credit mortgage broker may be able to assist you in getting a mortgage on a pension.
Bad credit could include:
A debt management plan
A home reposession
Can you get a mortgage on a pension if you are self-employed?
Getting a mortgage on a pension if you are self-employed is certainly possible but most mortgage lenders may want to see your accounts for 3 years at the very minimum although there may be mortgage lenders willing to offer a single person mortgage with less than 3 years worth of accounts but at least 12 months.
The documents you may need as a self -employed mortgage include:
Your company accounts if you work through a limited company
Your bank statements
Any contracts if you are a contractor
You may find using the services of a mortgage broker who has experience dealing with self-employed borrowers.
Other considerations a mortgage lender may take into account when offering a mortgage on a pension to a self-employed borrower are:
The Trading style: are you drawing a salary from a company or do you have a claim over a share of retained profits. These could make a significant difference in how much you may be able to borrow.
Your experience: how long have you been self-employed and what is your working history.
What are the mortgage affordability requirements when getting a mortgage on a pension?
When getting a mortgage on a pension you will find that the mortgage affordability requirements differ from one mortgage lender to the other.
In general, most lenders will consider the below for a mortgage on a pension:
How long you have received a pension income
The type of pension income you receive
If you have any other supplementary income
The mortgage deposit you have
The type of property e.g non-standard construction
Your age when you make an application for a mortgage on a pension
Your current working status
The type of mortgage you are after e.g traditional mortgages or equity release mortgages. such as retirement interest-only mortgages lifetime mortgages etc.
What pension income is accepted for a mortgage on a pension?
When looking to get a mortgage on a pension the mortgage lender will usually look to see if the pension income can comfortably cover your monthly mortgage repayments and still leave you room for any financial emergencies you may have.
As pension income is a reliable source of income almost all mortgage lenders will consider 100% of it when assessing your mortgage affordability.
The different types of pension income which may be accepted for a mortgage on a pension include:
- Employer pension income
- Self-employed retirement income
- State pension income
- Private pension income
- Disability pension (benefits)
- Widows pension income
- Armed forces pension income
The mortgage lender will want to see bank statements showing pension payments as well as a pension statement or a pension certificate.
Are you eligble for Support for Mortgage Interest (SMI)?
If you receive some certain types of benefits then you may be eligible for Support for Mortgage Interest which helps you pay the interest portion of your monthly mortgage repayments if you receive pension credit. It will pay up to £100,000 and you may be entitled to up to £200,000 if you receive other benefits such as
Support for mortgage interest may come in the form of a loan based on the benefits you receive.
Can you take a mortgage on a pension after you retire?
Yes there are mortgage lnders out there that will consider you for a mortgage even after you have retired as long as you can show them how you will make and maintain the monthly mortgage repayments.
Using a sepcialist mortgage broker may help you get a mortgage if your situation appears complex.
Use a mortgage broker for your mortgage in principle
You may want to use an independent mortgage broker to help you get a mortgage on your new home.
Mortgage brokers are important as they can access mortgage products from across the whole of the market in some cases.
This could be over 11,000 mortgage products. This may have some advantages rather than going directly to a mortgage lender.
A mortgage broker will look to understand your financial circumstances and then provide recommendations on which mortgage products may be suitable for you based on your mortgage affordability.
After giving you these mortgage recommendations, most mortgage brokers will seek your consent to apply for a mortgage in principle.
This will allow you to shop for your home as more estate agents and sellers may take you seriously and it will also give you confidence that your mortgage is indeed a possibility before you make a full mortgage application.
Once you have found a home you want to buy and are satisfied with the mortgage offer for your mortgage then the mortgage broker will then look to get you a mortgage offer.
This will come with a key facts illustration document that details the features of your mortgage including how much you will pay per month.
It will also contain information on if there are any limits such as early repayment fees, or annual overpayment limits.
If you are happy with everything you can then go on to secure your mortgage with the help of a conveyancer.
Your conveyancer will manage the legal searches on the property to ensure there aren’t any issues with it.
They will oversee the sales agreement to ensure it is in your best interest, they will manage the transfer of mortgage funds, exchange contracts with the seller or their conveyancer, and set a completion date with the seller or their conveyancer.
This will then bring an end to the conveyancing process, at which point you will receive the keys to the house and move in.
If you need financial advice and you live in the UK then you could contact the Money Advice service over the phone or via chat for impartial advice.
You can also contact the debt charity “Step Change” if you are in debt and need help.