Believe it or not, you can use your pension income to apply for a mortgage and even to pay it off. Let’s look at how you can do it, how much you could borrow, and what the age limits are.
Using your pension to apply for a mortgage
Because pension income is generally recognised as a stable and predictable source of income, you can use it to qualify for a mortgage – depending on the size and type of mortgage you’re after.
Your main challenge could be fitting the lender’s eligibility criteria. If you’re applying for a mortgage in retirement, you’ll need to look into the lender’s upper age limits. Some lenders set their limit at 75, but others will lend to borrowers up to 85.
How much can you borrow when using your pension for a mortgage?
If you’re looking at a standard residential mortgage, lenders typically let you borrow between 4 and 5.5 times your annual income. To get a clearer idea of what that means for you, use our mortgage calculator.
What will lenders look at when considering a pensioner for a mortgage?
There are a number of things lenders will assess when you apply for a mortgage using your pension. Age, income, and affordability are some of the main ones, but here are a few more:
Mortgage duration
Credit history
Property value
Equity and deposit
Your health and longevity
Financial commitments and existing debts (if any)
What types of pensions are accepted as income for a mortgage?
While you might find that different lenders have different preferences on which pensions they’ll allow, there are some pensions that are generally accepted across the board:
Employer pensions
State pension
Private pensions
Stakeholder pensions
Widow’s pensions
Armed Forces pensions
Disability pensions (benefits)
Self-invested personal pensions (SIPPs) – you can only use this pension for commercial property
If you’re hoping to use a pension that you don’t see on this list, reach out to The Mortgage Hut and one of our retirement mortgage experts will advise you.
How you take your pension
The way you take your pension income will affect the mortgage options available. But don’t worry, most pension schemes are pretty flexible nowadays, so you’re unlikely to run into any problems.
A defined benefits pension would work well for a repayment mortgage, because it provides regular income each month that could cover your repayments.
A defined contribution pension would work well for an interest-only mortgage because you could use your lump sum pension as the repayment vehicle.
If you take your pension as annuities, it might be harder to finance a mortgage. This is because there may be more restrictions on how often you can make withdrawals and mortgage lenders prefer to see evidence of monthly income.
How to get a mortgage with your pension income
Applying for a mortgage with your pension income isn’t too different from applying with any other source of income. You’ll just have to provide the relevant documentation for your pension.
You’ll then need to check your credit report to make sure everything is accurate and up to date. Then you can start your search for mortgage lenders who are happy to lend to applicants using their pension.
Using your pension for a deposit
If you have a defined contribution pension, you can take out a lump sum of 25% tax-free (capped at £268,275 for most people), and the rest is taxed as income. This can be a useful way to raise a deposit, but it would leave you with fewer funds for your retirement – so it’s wise to speak to a financial expert before going ahead.
Using your pension to pay off your mortgage
This 25% tax-free lump sum can also be useful to help you pay off the final chunk of your mortgage. There are pros and cons to this, so again, it’s wise to speak to an expert for taking this step.
What if I’m not a pensioner yet?
If you’re not yet a pensioner but hoping to secure a mortgage in the future, lenders will simply assess your current annual income, savings account, and financial stability. Then when you approach retirement, your future pension income and retirement plans will be factored in to make sure you can afford to pay your monthly mortgage payments.
It’s helpful to ask your pension provider to confirm the following:
Retirement age
Current pension pot value
Predicted pension pot value
Expected retirement income
Making sure you know how your future pension may affect your mortgage application is important because lenders will want proof that you can continue meeting your mortgage repayments even into retirement.
The Mortgage Hut can help you apply for a mortgage using your pension
However you want to use your pension for your mortgage – whether for a deposit or to pay off what’s left of your outstanding loan – we can help you do it.
We believe everyone should have access to a mortgage, no matter their circumstances. That’s why we have specialists in every type of mortgage, including pension mortgages. Our experienced team will help you find the right lender who will look favourably on your application and offer you a mortgage product that works for you. Contact us today to get started.
FAQs
Can pensioners get a mortgage?
Yes. Provided you’re under a lender’s upper age limit (often 75 but sometimes up to 85), you can use your pension as income to apply for or pay your mortgage. Speak to an expert mortgage broker for more information.
What is a retirement interest-only mortgage?
Retirement interest-only mortgages (RIOs) only require the borrower to prove they can afford the interest on the loan, and there is no mortgage term or ‘end date’. With no capital repayments until the borrower passes away or decides to move into residential care or sell up, this type of mortgage can be more financially manageable for those on an income from a pension.
