When discussing lending needs with a client it’s essential to consider their financial situation both now, and over the term of the mortgage. As a responsible lender, we encourage all advisers and clients to plan ahead for life’s uncertainties. We want all of our borrowers to be comfortable with how changes in circumstances affect the ability to repay their mortgage.
This brief guide identifies some of the key questions to be asked as part of assessing affordability in later life.
Longevity of income
Borrowers are more likely to pass an affordability assessment if their income in retirement lasts for life. An element of lifetime income is therefore desirable, whether in the form of the state, occupational or private pensions.
If there is a risk that income could stop in future, consider how this compares to the term of the mortgage.
Losing a loved one is considered the most stressful life event based on the Holmes and Rahe Stress Scale. The worst case scenario is that a borrower faces mortgage payment difficulties at a time when they are also grieving.
As a responsible lender, our affordability testing assesses the impact of a drop in income on the client’s ability to repay. The level of income passing to the survivor in the event of first death is therefore a key driver in determining affordability.
Inflation can erode the level of disposable income significantly over a long period of time. Whilst employment earnings generally keep pace with inflation, many pensions are paid on a level (non-escalating) basis. Having a proportion of index-linked income in the borrower’s portfolio is a great help in ensuring that a later life loan remains affordable over the longer term.