Contrary to popular belief, it is possible to secure a mortgage once retired or over the age of 60. However, aside from the usual risks associated with obtaining a mortgage, there are a number of extra considerations that retirees or borrowers in later life should take into account before they take on a mortgage debt.
These considerations include the affordability of monthly repayments, future care requirements and the effect of a mortgage loan on your estate after death – it’s important to consider each of these areas to help you determine the best course of action.
The affordability of a mortgage for over-60s
When calculating the affordability of a mortgage, a lender will review the proposed borrower’s income against the anticipated monthly repayments, to ensure they will be able to afford payments throughout the full duration of the loan – including in the event of a rise in interest rates.
For a retired borrower, a lender is not able to use employment income, but instead has to rely on the borrower’s pension income, assets and savings to determine whether the monthly repayments can be met.
In addition, and in contrast with a younger borrower whose mortgage term can be up to 40 years, due to their age an older borrower is more likely to be offered a shorter loan duration – generally only 10 to 15 years. This will, in turn, increase monthly mortgage repayments, as the lender be balancing the likelihood of them being fully paid before the borrower passes away with the security they have over the equity in your property.
When thinking about applying for a mortgage after retirement or at an older age, you should consider whether you have enough in your pension pot or savings in the event of changes to your monthly income (for example, from share dividends, state pension or rental properties). You should also consider how the mortgage would be repaid in the event of your death.
The process of equity release for homeowners
An equity release mortgage is another option to consider if you already own your home. An equity release mortgage is where a lender ‘releases’ some of the equity in your property in the form of a cash payment which will be repaid to them when the property is sold, which they may be on your death or if you decide to sell sooner. No repayments are made during ab equity release mortgage, rather the interest rolls up and is added to the loan.
Equity release mortgages tend to have higher interest rates, meaning the repayment required on sale of the property will be much more than the equity initially released.
How to know when you need independent legal advice
Some lenders require older borrowers to receive independent legal advice, informing them of the implications of entering into a mortgage in retirement or old age. This is generally required to ensure that the borrower is aware of their situation and the contractual obligations of their mortgage.
In some circumstances, a lender may be happy for the borrower to receive this advice from a solicitor within the same firm as their conveyancer. However, some lenders will require you to receive this advice from another independent law firm.
In any event, receiving this advice will come at an additional cost to consider when proceeding with a property purchase, making it another expense that you need to consider.
The implications of long term care as you progress in old age
As you grow older, the possibility of requiring short or long-term care increases. While those with considerable assets are able to pay for care privately, those who cannot afford the private fees have to rely on their Local Authority, which will ‘means test’ the level of financial assistance offered to a person against their income and capital.
Income includes private pensions, security benefits and any earnings derived from employment. Capital includes cash savings and investments, land and property (including overseas property) and any business assets you own at the time of application.
If you require only short-term care, your home may not fall within the Local Authority’s means test. However, if you require long-term care, the Local Authority will consider the value of your property (if it is solely in your name and no one else lives in it) when assigning how much financial assistance they will provide for your care. This could mean that you will ultimately need to sell your house to pay for your care, which will include having to repay the existing mortgage.
If you lose mental capacity while your mortgage is outstanding, your lender may force the sale of your property if you have fallen behind on your mortgage repayments, which could result in your home not being sold at its optimum price.
The inheritance implications of an unpaid mortgage
If you enter long-term care and are forced to sell your property, this will impact on the value of your estate, and prevent your home from being passed to your beneficiaries under your Will. It may be necessary for a property to be sold to pay Inheritance Tax due on your estate.
A property with a mortgage will reduce the amount of inheritance your beneficiaries will receive on your death. Your Will may be drafted, to elect for either your estate or a beneficiary to be responsible for the repayment of the mortgage.
If you obtain an equity release mortgage, your estate may be forced to sell the property quickly – perhaps even below optimum price – to realise the equity as soon as possible.
If a beneficiary receives a property but responsibility for the mortgage under the terms of a Will, they may need to sell the property in order to repay the mortgage. Alternatively, if they have the means to take on the borrowing themselves, they may decide to remortgage in their own name.
If a beneficiary receives a property, but the will specifies the estate is responsible for the mortgage, the estate will have to redeem the mortgage first. This means that whoever is inheriting the residuary estate will receive this, less the mortgage redemption amount.
Seeking advice from your Independent Financial Adviser and Mortgage Broker
It is essential that you speak with an independent financial adviser and/or a mortgage broker prior to applying for a mortgage or loan.
They will also be able to:
- Help you to identify the best options for both your short term and long term position
- Advise you on how to protect your assets in the future
- Inform you of inheritance tax implications relating to each potential decision
With that said, what is asset protection and how important is it to write your Will in accordance with inheritance tax planning and protection of your assets?
Asset Protection, Inheritance Tax Planning and your Will
Asset protection is what you might want to consider during your lifetime in order to try and guard your assets (including your property) from taxation on your death. This can be more difficult when your property is your main asset, as removing it from your estate (for example, by transferring ownership into your children’s names) could leave you vulnerable in terms of your security of occupation.
Planning to minimise Inheritance Tax on your estate often involves the gifting of excess assets and investments while still alive, though any gifting should be carefully considered with advice from a financial advisor, as well as your legal advisor and accountant to ensure a balance is struck between reducing your Inheritance Tax liability and making sure you have sufficient funds to live comfortably for the rest of your life.
The value of your estate determines the amount of Inheritance Tax your estate will have to pay on your death. If a mortgage has not been repaid by the time of your death, the unpaid amount will be deducted from your total estate value.
When drafting your Will, and as mentioned above, you can decide to make redemption of a mortgage the responsibility of a beneficiary of the property, or your estate. If the latter applies, the mortgage redemption can be paid out of the residuary funds held by the estate before any remainder is distributed to your beneficiaries. If the mortgage becomes the responsibility of a particular beneficiary (or beneficiaries), they will need to either redeem the mortgage personally, or refinance it in their own name(s).
Whenever there are any significant changes in your financial circumstances, including entering into a mortgage, you should consider the wider impact this has on your asset protection, Inheritance Tax planning and Will. You should also ensure that you coordinate these matters to ensure that when you die, your wishes are met.
If you would like to review your Will or discuss how best to protect your assets, you should seek specialist advice from a specialist solicitor. Our Private Client team are always happy to have a chat with you, without any obligation.
When considering taking out a mortgage, you should ensure that it is affordable for you (both now, and in later life), and that you have considered what may happen to your mortgaged property should you need to go in to care. Before you enter into a mortgage, you should review your Will and make sure that it reflects how you wish the mortgage to be dealt with on your death, and to whom you wish to leave the mortgaged property.
Your Solicitor can advise you on your Will, asset protection and any inheritance tax implications. In addition, you will need to seek advice from your mortgage broker or independent financial advisor to further explore your financial options and whether a mortgage is suitable for you.
For help with Wills, Lasting Powers of Attorney, Estate and Inheritance Tax planning get in touch with our team of expert Private Client Solicitors. Every situation is different and we understand that sometimes it can be unclear what your options are, call our team today for an obligation free conversation and honest advice on 0330 912 8338.