Surveys carried out by the Nottingham Building Society revealed that almost half had stated that they had experienced a high majority of turned down Mortgage applications from clients in their 40’s.
When customers, aged between 45 & 54, were directly asked they had said they thought it was down to their age. There are various factors as to why I people are experiencing this and what positive steps a person can make if an application is made later in life.
To delve into this deeper, it’s best to look at the days of computerised credit scoring and increased regulation. If a customer went into their local Building Society for a mortgage, then they would speak to a Mortgage Advisor. The Advisor would individually assess personal details which are brought forward and then decide on the outcome of the application.
If an application was approved, then the next step would be overseeing the amount which is allowed to be borrowed. The way this will be worked out would be expressed quite simply as a multiple of your gross salary, e.g if you were earning £20,000 per annum and the lender’s income multiple was 3.5x then the allowed mortgage amount would be £70,000.
However, this income multiple method didn’t take account of age. Therefore, it didn’t matter if a person was 30 or 50 years of age, the same amount of money is allowed to be borrowed.
But by looking into this further if two applicants consisting of the ages of 30 and 50 years of age were both due to retire at the age of 65 then the first applicant would be granted a mortgage term of up to 35 years, whereas the second applicant would only hold 15 years to be able to make their monthly payments which would make them much higher.
Let’s take the above £70,000 mortgage and use that as an example, using a notional interest rate of 5%:
So here now there are two identical earners with the same mortgage debt, but applicant two’s monthly payment is considerably higher. If interest rates went up, then the risk of arrears is increasingly higher for applicant two than applicant one. Therefore, modern mortgage calculators now consider the maximum term of the mortgage as well as your income and expenditure.
It’s not so much that older customers are being turned down but that they are being told the amount they are able to borrow is lower than the amount they had in mind. Of course, the general public is constantly being reminded that we are going to have to work until a later age by the Government before qualifying for our State Pension. It is clear that banks don’t seem to be taking this into account when granting mortgages. This can be explored further:
Firstly, some occupations involving manual work won’t be fit for a person to work into their seventies and beyond.
Also, lenders are closely monitored by the Regulator in terms of repossessions and arrears cases which means they want to minimise this risk. The process of taking a property into possession can be very costly and may attract bad press for the lenders reputation. Therefore when after approving mortgages for mature applicants they don’t want to be seen kicking a vulnerable older person because they couldn’t afford their payments.
The good news is lenders will consider granting mortgages past normal retirement ages if sufficient evidence is showing affordability can be kept up with after retirement. This could include a letter from your Pension provider with a projection of your future income. An issue here is that most people will likely take a reduction in income at retirement. Therefore, you will need to prove that the mortgage monthly payments can still be paid from that reduced income. In practice, this hardly ever works unless a very small mortgage is granted.
The default retirement age was scrapped in 2011 and employers can no longer force an employee to retire. As such whilst lenders use the State Retirement age as the age that the mortgage must be paid off, it has become more normal for them to let the intended retirement age be self-declared.
If you find yourself in this position then you must prepare to be questioned on how you will afford your mortgage in later years. The consumer protections and regulations are in place to protect consumers and encourage prudent lending. If you need the mortgage term to run past your normal state retirement age you will need to demonstrate how you will sustain payments and provide proofs if requested.
Our Specialist Mortgage Advisors in Harrogate will be able to talk this through with you and find the best way for your mortgage application to go ahead and the best options available to you.