We assess affordability on the basis of disposable income. As a responsible lender, we consider a client’s affordability over the lifetime of the mortgage, not just at inception like most high street lenders. This ensures affordability over the duration of the mortgage and can help smooth any future changes to income.
Income levels we accept:
- The expected level of pension in payment income earned each year including state pension
- Employed or self-employed income each year
- Any additional rental including commercial rent, Ltd company residential rental
- Spousal/maintenance and sub-contractors income
- Investment income received each year
- Unvested pensions and drawdown
These are then offset by:
- The level of outgoings each year to cover the cost of living
- The level of payments due on existing credit commitments
- The additional interest payable on this mortgage
- The impact of increased interest rates
- The impact of the death of a borrower on affordability for the surviving party to the loan
- The loan to income ratio (LTI) at inception and during the lifetime of the mortgage
We look at the interest coverage during the lifetime of the mortgage. If there’s a shortfall in the interest coverage, we may need to review the application further. We’ll tell you if we do, and if we need more information, we will let you know.
To help you understand and evidence your client’s affordability, we’ve detailed further information that we may ask for when reviewing your client’s application. Click here to find out more.
Pensions in payment
Eligible pensions must be payable for the rest of the client’s life, and must not have a pre-defined end date. The sources of pensions we accept are:
- Defined benefit pensions in payment
- Defined contribution pensions in payment
- Annuities in payment
- State pensions that are payable for life
- State benefits which are confirmed as guaranteed for life
When seeking proof from your client, the amounts payable can be confirmed through entitlement statements, payslips and P60s. Confirmation should also include details of whether the income is index linked and also include details of any spousal benefits. Please note that, as payments are made for life, 100% of the gross income is eligible.
Unvested pensions and drawdowns
We’ll take into account unvested (defined contribution/define benefit) pensions and drawdowns provided they are held within a designated pension ‘wrapper’ and represent savings which have attracted tax relief as they were accumulated.
Eligible types of investment income must demonstrate the following characteristics:
- All sources of income must be derived from an underlying asset or asset pool that itself has a value were it to be realised
- For income derived from an asset or asset pool, a surviving spouse must inherit those assets, and the income therefore continues to flow
We will derive eligible rental income from residential property let as a whole and located in the UK. Types of income include Ltd company residential rental income, and holiday rental income, we will also consider commercial rental income. Please note that income from lodgers or tenants within the security property is not eligible. Rental income must be greater than 110% of the mortgage payment for it to be used.
The types of pre-retirement income we will consider are restricted to:
Basic salary or wages and if applicable:
- Regular or guaranteed commission, bonus, overtime and shift allowance
- Car allowance and large town allowance/London weighting
- If self-employed as a sole trader, the average two year net profit or latest year, whichever is the lower
- If self-employed as a partner, the average two year partnership drawings or the latest year, whichever is the lower
- If a director of a limited company, basic salary (if taken) and the average two year dividend drawings or latest year, whichever is the lower
- Income from contractors
We will take into account these incomes up to the date the borrower states that they will stop working, provided this appears feasible. We would not expect borrowers in jobs requiring physical exertion to work significantly beyond the standard retirement age and there is an absolute age limit on these earnings set at 80.
If the client(s) are already retired at the time of application, we will base our lending on the actual pension already being received.
Borrowers nearing retirement
- Underwriting and affordability must therefore be based on projected pension income for customers who have not yet retired
- We will need to establish that the customers have sufficient income to service the monthly interest payments in the time leading up to retirement
Death of a borrower
Due to the nature of the Retirement Mortgage and 55+, it is imperative that the potential impact of the borrower’s death is considered.
We must be satisfied that a surviving borrower is able to support the monthly interest payments upon the death of the partner. This could be in the form of:
- The borrowers own pension of which evidence will have already been received
- Income in the form of a survivor pension. This is the insurance portion of the deceased borrower’s pension provision, and will be paid to the surviving party upon death of the plan holder. This can be verified at the time of application by the plan provider
Our approach to affordability is considered, and thorough. If there’s anything else you want to clarify, or questions that need answering, please get in touch.