Many people ask the question: Can I use my pension to get a mortgage? The short answer is yes. But as with any other mortgage, you have to prove that you'll be able to pay back what you borrow. This guide will show you different types of mortgages available to pensioners, how lenders assess clients for these mortgages and more.
To answer the question "Can I use my pension to get a mortgage?" in detail, we first have to explore the different types of mortgages available for people who draw on their pensions as a source of income. Let's explore what some of those options are.
find me a mortgageThese are mortgages where you have to pay the interest each month, but not the outstanding balance. Instead, the outstanding balance is paid back when you die. They're similar to standard interest-only mortgages, but they are only available to those over 55.
OPSO is a government-backed scheme that lets pensioners buy up to 75% of their home's value with a mortgage and then rent the remaining 25%. This option gives you more flexibility than an interest-only mortgage in that it allows you to downsize your property later in life if your circumstances change.
Equity release is when you borrow money against the value of your home. There are two main types of equity release: lifetime mortgages and home reversion plans.
A lifetime mortgage allows you to borrow money against the value of your home, and you can choose to repay the loan plus interest or wait until the end of your life. With a lifetime mortgage, you retain ownership of your property.
With a home reversion plan, you sell all or part of your home to a provider in return for a lump sum or regular payments. You would then have the right to continue living in your home rent-free until you die or move into long-term care. This option will reduce the value of your estate and could affect your eligibility for means-tested benefits.
The following are some of the factors most lenders will consider to determine if your retirement income is enough for them to work with.
Lenders will want to know if this is steady or variable income and how long you will receive it. From there, they can determine whether or not you will be able to make your monthly mortgage payments based on this information.
The lender wants to know how much money you make at the end of each month before tax and any other deductions. They'll also ask whether this is a guaranteed amount or if it changes from month to month. This helps them decide on your stability and, in turn, your ability to pay off your mortgage.
Pensions are often designed to last for about as long as the average age at which people die. So, if you take out a mortgage that lasts for 30 years, but you're retired and only have about 20 years left to live, it can pose some problems.
Lenders are likely to assess how long you have been receiving a pension before they allow you to use it as evidence of your ability to repay the mortgage. They will usually want to see that you have received this income for at least one year before they let you use it towards your application. They want proof that the payments are regular and stable over time.
Your credit history is essential because it shows how well you have managed credit in the past. The lender will look at your credit report for missed payments, defaults, or court judgements. If you have a good credit history, this will work in your favour when applying for a mortgage.
Keep in mind that these are just guidelines. Each lender will assess their clients differently –and not all lenders will require that your pension is used as security when giving you a mortgage.
Pensioners have some unique hurdles to jump through, but getting a mortgage doesn't have to be impossible! Here are a few tips for how to get a mortgage when you're retired.
This can be tricky because lenders tend to like borrowers working full-time and younger than 65 years old. But you're still able to get a loan. It's just going to require some extra work on your part.
You'll need bank statements, tax returns, and proof of income (like your pension), so start gathering those up before applying for any loans. It also helps to know what you're looking for in terms of the mortgage amount and interest rate – and be prepared to negotiate if possible.
Save up for the down payment and closing costs on your mortgage (which could be as much as 20% of the home's value). The more of a down payment you can put toward the house, the better off you will be when taking on a mortgage. Once you have the money saved up and the paperwork done, all that's left is to sign the agreement.
We are an end-to-end digital mortgage broker that covers the whole of the UK to help you find the right type of mortgage for your unique situation. Whether you're looking to buy a house in Kent, London, Essex, or Buckinghamshire, we can help!
We offer specialist advice for contractors and other categories of people who may be looking for mortgages. We're also proud to provide a range of services our clients need beyond mortgages – including accountancy (not regulated by FCA), business protection, pension, wealth, and insurance.
If you're considering using your pension to get a mortgage, feel free to contact us for free advice. Alternatively, you can use our mortgage calculators to help determine what kind of loan you can afford or how much your monthly payments will be.
As a mortgage is secured against your home/property it may be repossessed if you do not keep up with the mortgage repayments.
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