Banks ban homeowners from using pension benefits and payments to pay mortgages
Obtaining state benefits or retirement income is not considered by some lenders, meaning borrowers face limited choice and may end up paying more than necessary
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Many Britons are unaware that getting benefits or a Pension can mean that up to half of lenders won’t give them a mortgage.
This means that they are faced with limited choice and it may be more difficult to access the housing ladder.
The problem is that in order for borrowers to get a mortgage, lenders look at all their sources of income to see if they can afford the loan.
This includes salary, but also things like advantages and pension payments.
Many only take into account certain types of income and not others, which can be a huge shock.
Lenders also disagree on what they consider appropriate income and what they don’t, which is tripping up many people.
David Hollingworth, of L&C Mortgages, said: “I think people may be under the mistaken impression that lenders will take into account all of their income.
“They total everything and expect their lender to accept everything.
“But each type of income may be treated differently, and it may be treated differently by each lender. With Universal Credit, for example, some may only consider a proportion and some may not allow it at all.”
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For example, if you get a company or private pension, all 71 mortgage lenders who provide standard home loans classify that as income.
That’s according to mortgage broker software Criteria Brain, which lists what lenders do and don’t look for.
If you receive a state pension, three lenders don’t allow it – but 68 still do.
But things are a little different if you get Pension credit, a benefit that supplements the income of retirees and helps them to have a decent standard of living.
Thirty of the 71 lenders do not count this as income.
For example, Santander, NatWest and Barclays allow it, but Kent Reliance and Accord do not.
Eleven lenders don’t allow SIPPs, or self-invested personal pensions, while 22 don’t care about levies – money taken from a pension.
If you have a retirement pension, you benefit from a guaranteed cash flow until your death.
But despite this certainty that the money will continue to flow, 12 out of 71 lenders do not take money from the annuities.
Many older borrowers have interest-only mortgages, where they only pay the interest.
At the end of their mortgage term, they must repay the loan in full. Some will do this by selling the house, while others will want to use the pension money.
But be careful if you do, as only 16 out of 71 lenders will allow it.
The benefit situation is much worse.
If you get Universal Credit, only 45% of lenders accept it – 32 out of 71 lenders.
For example, major lenders NatWest, HSBC, and Halifax allow it, but Accord, Metro Bank, and Virgin Money do not.
For applicants for family allowances, 43 lenders oblige – that’s 60%.
For carer’s allowance, it’s 31 lenders out of 71, and for child tax credits, 44 lenders out of 71-71%.
Mortgage brokers can help you find the best deal, even if you fall into one of these categories.
Borrowers should also be aware that these strict rules apply to getting a mortgage from a new lender.
If Borrower A gets a mortgage and gets no benefits, but gets benefits when they repay, there’s no problem if they do it with their current lender and don’t s don’t walk away.
That’s because – most of the time – they won’t have to go through accessibility checks again if they stay put.
But if they want to swap with another lender, they’ll have to start the process all over again – and could run into trouble.