Using Pension Pot to secure a mortgage

Hoenir

@kingstreet  Do lenders still stress test affordability at higher interest rate levels? 

rebs

I'm also not averse to using some of the pension to purchase an annuity if that would help.

For example, I could get a 10 year annuity paying £35k a year for £290k - or even use £373k and get £45k a year for ten years.

That wouldn't be my first choice as that would be giving me more income than I need (but might require to get through affordability checks) thus paying a bit more tax than necessary.  My preference would be to leave it in the pension pot and draw down flexibly.

MWT

rebs said:

That wouldn't be my first choice as that would be giving me more income than I need (but might require to get through affordability checks) thus paying a bit more tax than necessary.  My preference would be to leave it in the pension pot and draw down flexibly.

The problem is going to be the continued exposure to market movements and the degree to which you could withstand your 'pot' reducing as a result but still being able to cover the monthly payments...

You probably need a good IFA rather than just a mortgage broker to go through the numbers and figure out the best way to meet the affordability requirements without unnecessary exposure to tax or market risks.

I do suspect that a Retirement Interest Only (RIO) product may suit you best as long as it allows for overpayments so you can choose to reduce the capital outstanding if you wish, but are not obligated to do so.

You could probably get close to what you need to borrow just using an rolled-up interest equity release product which would have the advantage of not requiring any repayments at all and hence no affordability checks, but still give you the option to make repayments as and when you wanted (typically limited to 10% of the initial loan P.A.).

An IFA is certainly feel9ing like a good option...

rebs

MWT said:

rebs said:

That wouldn't be my first choice as that would be giving me more income than I need (but might require to get through affordability checks) thus paying a bit more tax than necessary.  My preference would be to leave it in the pension pot and draw down flexibly.

The problem is going to be the continued exposure to market movements and the degree to which you could withstand your 'pot' reducing as a result but still being able to cover the monthly payments...

You probably need a good IFA rather than just a mortgage broker to go through the numbers and figure out the best way to meet the affordability requirements without unnecessary exposure to tax or market risks.

I do suspect that a Retirement Interest Only (RIO) product may suit you best as long as it allows for overpayments so you can choose to reduce the capital outstanding if you wish, but are not obligated to do so.

You could probably get close to what you need to borrow just using an rolled-up interest equity release product which would have the advantage of not requiring any repayments at all and hence no affordability checks, but still give you the option to make repayments as and when you wanted (typically limited to 10% of the initial loan P.A.).

An IFA is certainly feel9ing like a good option...

Thanks - that's really helpful.

Would such products be suitable for a house purchase?  I think I had always assumed 'equity release' type products were only applicable on an already owned house?

How would I go about finding a suitably qualified IFA that would also advise on mortgages?  I'm not keen on shelling out masses on fees if I can help it. I'm planning to self manage the pension pot without paying for an advisor.

MWT

rebs said:

MWT said:

rebs said:

That wouldn't be my first choice as that would be giving me more income than I need (but might require to get through affordability checks) thus paying a bit more tax than necessary.  My preference would be to leave it in the pension pot and draw down flexibly.

The problem is going to be the continued exposure to market movements and the degree to which you could withstand your 'pot' reducing as a result but still being able to cover the monthly payments...

You probably need a good IFA rather than just a mortgage broker to go through the numbers and figure out the best way to meet the affordability requirements without unnecessary exposure to tax or market risks.

I do suspect that a Retirement Interest Only (RIO) product may suit you best as long as it allows for overpayments so you can choose to reduce the capital outstanding if you wish, but are not obligated to do so.

You could probably get close to what you need to borrow just using an rolled-up interest equity release product which would have the advantage of not requiring any repayments at all and hence no affordability checks, but still give you the option to make repayments as and when you wanted (typically limited to 10% of the initial loan P.A.).

An IFA is certainly feel9ing like a good option...

Would such products be suitable for a house purchase?  I think I had always assumed 'equity release' type products were only applicable on an already owned house?

How would I go about finding a suitably qualified IFA that would also advise on mortgages?  I'm not keen on shelling out masses on fees if I can help it. I'm planning to self manage the pension pot without paying for an advisor.

Yes, you can use retirement and equity release products for a purchase, but you do need to find an advisor that has experience with retirement products as not all work in that range as the requirements and considerations are rather different to the 'normal' mortgage market.

I would suggest asking friends and family if they have any personal experience with financial advisors and check local firms in your area, before looking further afield. 

Linton

7 years ago, I bought a house with a RIO with affordability based on a pension pot.  . This was with the assistance of an IFA who was also a mortgage broker. His involvement was essential as drawdown had only just become mainstream and so he had to discuss the mortgage  application directly with the risk manager. The mortgage company were not used to the situation.

However  I later switched to full ER with an interest rate of 3% fixed for the life of the mortgage.

I believe ER and RIOs have effectively become a single product since in my case I can let the interest roll-up or pay it annually at no extra cost.

If you have any questions please ask.

MWT

Linton said:

I believe ER and RIOs have effectively become a single product since in my case I can let the interest roll-up or pay it annually at no extra cost.

They differ completely in that a RIO requires sufficient income, stress-tested again the individual incomes in retirement of those on the mortgage, whereas ER has no income requirements at all, but depends only on the value of the property itself.

So there will always be people with needs better suited to one or the other route...

rebs

Linton said:

7 years ago, I bought a house with a RIO with affordability based on a pension pot.  . This was with the assistance of an IFA who was also a mortgage broker. His involvement was essential as drawdown had only just become mainstream and so he had to discuss the mortgage  application directly with the risk manager. The mortgage company were not used to the situation.

However  I later switched to full ER with an interest rate of 3% fixed for the life of the mortgage.

I believe ER and RIOs have effectively become a single product since in my case I can let the interest roll-up or pay it annually at no extra cost.

If you have any questions please ask.

Thank you - that’s very helpful.

Can I ask how old you were at that point? Were you unable to get a conventional mortgage, or were you always looking for a RIO product?

I’m currently talking to 2 or 3 brokers and one of them thinks they might be able to get me a conventional mortgage which would be my preference… early days in the process though.

MWT

rebs said:

I’m currently talking to 2 or 3 brokers and one of them thinks they might be able to get me a conventional mortgage which would be my preference… early days in the process though.

If you can get a conventional mortgage that that really should be preferable to ER for example, and of course it still leaves ER as an option later on if things change and you need to clear the mortgage rather than continue paying it...

Linton

MWT said:

Linton said:

I believe ER and RIOs have effectively become a single product since in my case I can let the interest roll-up or pay it annually at no extra cost.

They differ completely in that a RIO requires sufficient income, stress-tested again the individual incomes in retirement of those on the mortgage, whereas ER has no income requirements at all, but depends only on the value of the property itself.

So there will always be people with needs better suited to one or the other route...

In that detail, yes they are different. But you could consider the value of your house as part of the affordability. So in practice there is much less difference than you may have first thought. In effect they are two extremes in a range of optimising your retirement finances.  After all, if you choose to go for a RIO the value of the house want to  buy is still the major factor. In my case RIOs offered 50% and ER was around 30%.  

So my reason for initially choosing a RIO was to up-size to the best house I could reasonably afford. I predicted the rise in interest rates and switched to ER just before it happened.

So An important benefit of of an ER is that the interest rate is fixed for the duration of the mortgage. No worries about future rate increases. But you can still pay off the interest as with a RIO if that is what you want to do.

On the other hand just going for a RIO will probably get you a larger mortgage especially if you are relatively young.