Using Pension Income for a Mortgage

Find out how to get a mortgage on a pension, what the age limits are and how much you could borrow.

Are you looking to use pension income on your mortgage application?

Home Income Types Using Pension Income For A Mortgage
Pete Mugleston

Author: Pete Mugleston

Mortgage Advisor, MD

Updated: March 15, 2024

In this article, we’ll explain how you can use your pension income to apply for or pay off a mortgage, including how much you could borrow, the types of mortgages available and why it’s recommended that you speak to a broker first.

Can you use pension income to qualify for a mortgage?

The short answer is yes. Pensions are widely recognised as a stable and predictable source of income, so depending on the size and type of mortgage you want, you should be able to use your pension to qualify for one. However, you will also need to fit the lender’s eligibility criteria across the board, which can be more difficult as an older borrower.

The main obstacle you are likely to run into when seeking a mortgage in retirement is the upper age limits set by most providers: this is usually capped at 75 years of age at the completion of term, but some will lend to borrowers aged up to 85 and a few don’t set any age limit in the right circumstances.

What if all of your income is from a pension?

Even if your pension is your only source of income, you should be able to find a lender that will cater to you. In fact, many consider pensions to be more reliable than other types of earnings such as employment income.

The most important factor here is affordability – see the next section for full details about this.

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How much can you borrow?

This depends on the type of mortgage you want. Most lenders will allow you to borrow up to 4.5 times your annual income if you’re taking out a ‘traditional’ residential mortgage and it won’t make a difference whether this income is from a pension or from any other qualifying source.

To see how this could work out for you, just input your annual pension income into our calculator below:

Mortgage Affordability Calculator

Use this calculator to determine how much you could potentially borrow for a mortgage, based on the typical salary multiples used by most UK lenders.

Input full salaries for all applicants
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Your Results:

You could borrow up to 

Most lenders would consider letting you borrow

This is based on 4.5 times your household income, the standard calculation used by the majority of mortgage providers. To borrow more than this, you will need to use a mortgage broker to access specialist lenders.

Some lenders would consider letting you borrow

This is based on 5 times your household income, a salary multiple you might struggle to qualify for without the help of a broker. This income multiple is not widely available to customers who are applying directly with a lender.

A minority of lenders would consider letting you borrow

This is based on 6 times your household income, a salary multiple you will struggle to get without a broker. Six-times salary mortgages are usually only available under very specific circumstances.

Get Started with an expert broker to find out exactly how much you could borrow.

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If you are looking to take advantage of the wider range of products available to borrowers of retirement age however, see our pages on equity release mortgages and Retirement Interest Only (RIO) mortgages for more information on how much you could borrow for these types of home loans.

What types of pension are accepted as income?

Different lenders have their own rules about what types of pension they’ll accept for affordability purposes, but typically they will consider income from all of the following scheme types and more:

  • Employer pensions
  • State pension
  • Private pensions
  • Self-invested personal pensions (SIPPs)
  • Stakeholder pensions
  • Widows pensions
  • Armed Forces pensions
  • Disability pension (benefits)

If you’re not sure whether your pension will be viewed as suitable income, a broker with experience in the retirement mortgage field will be best placed to advise you on your options and will know which lenders to approach.

Does it matter how you take your pension?

There are lots of different ways you can use your pension for mortgage purposes, and the way you take your income is likely to affect the options available to you. However, the flexibility of most pension schemes nowadays means most people have plenty of options.

For example, if you have a defined contribution pension and want to take out an interest only mortgage, some lenders will accept a pension lump sum as a repayment vehicle. So for instance, if your pension pot is worth £100k, you have the potential to borrow £25k on an interest-only basis.

If you have a defined benefits pension, this could be ideal for a repayment mortgage as it provides regular, set income each month to cover repayments.

Finally, if you take your pension in the form of annuities, you may find it harder to use your pension to finance a mortgage as there will be more restrictions on how often you can make withdrawals, and providers generally prefer to see evidence of monthly income.

How to get a mortgage based on pension income

The first step should be to find a broker who specialises in pension-backed mortgages. Make an enquiry with us and we will match you with an advisor who has the exact knowledge and experience you need.

Your handpicked mortgage advisor will guide you through the following steps:

  • Preparing your pension documents along with all the other necessary paperwork and documentary evidence required for this type of application
  • Downloading your credit reports and optimising them to ensure any inaccuracies or outdated information is removed
  • Finding the right mortgage lenders who tend to look more favourably on applicants with this type of income and help you secure the best possible rate

Which lenders accept this income type?

Plenty of high street lenders will accept pensions as an income type, but there is also a growing number of specialist providers offering attractive deals for retired borrowers. These tend to be far more flexible than the better-known banks and building societies, especially when it comes to the borrower’s age.

If you are in a position to take out a standard residential mortgage, here is a small selection of the lenders currently accepting pensions as the main or sole form of income as of August 2023:

  • HSBC
  • Santander
  • Nationwide
  • Natwest
  • Pepper
  • Scottish Building Society

Others say they will accept it but with certain caveats:

  • ldermore accepts private pensions as income, but will not accept the state pension as a sole form of income.
  • Santander specifies that pension income paid less frequently than monthly can only be considered as secondary income.
  • Nottingham accepts pensions as income, but unless there is an additional source of earnings, it caps the loan-to-value (LTV) at 70%.

The above is intended as a snapshot of the market, but keep in mind that approaching one of these lenders directly is not recommended. This would mean limiting yourself to just one set of products and increasing the chances of missing out on the best deal or being rejected altogether.

Applying through a specialist broker is a better alternative, as this will open up an entire market of rates, deals and lenders to you.

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Using pension funds as a deposit

If you have a defined contribution pension, you can take out lump sums 25% tax-free for any purpose, with the remainder taxed as income. So if you’re buying a property and are eligible to withdraw pension money (usually after age 55) it could make financial sense to use it to raise funds for the deposit.

However, there may be more cost-effective ways for you to raise a deposit and any lump sum you take will reduce the funds you have available for retirement, so you should speak to an expert before taking this step.

Using a pension to pay off an existing mortgage

Pensions, in the form of the 25% tax-free lump sum, can also be a useful source of funds if you’re close to paying off your mortgage, but you need an extra cash injection to get you over the line. In fact, you can even do this before you retire as long as you’re no longer paying into the pension in question.

There are pros and cons to tapping into your pension pot to pay off your mortgage in this way, so we recommend you seek expert advice before going ahead.

An independent financial adviser will be able to set out the risks, benefits and alternative options such as downsizing or equity release – all of which will depend on a range of factors including the economic climate and your personal circumstances.

If you need an independent financial advisor to discuss your pension with, head over to our sister service, Online Money Advisor, to get matched with one.

Get matched with a broker experienced in pension-backed mortgages

If you’re interested in using your pension to take out a mortgage and would like to speak to an expert about your options, you can make an enquiry or call us on 0808 189 2301, and we’ll match you free of charge with a broker who specialises in arranging pension-backed mortgages for people like you.

Increase your chances of approval with a specialist in pension income mortgage applications

Get Started Phone Icon 0808 189 2301

FAQs

No, you cannot purchase residential property with a Self-invested personal pension (SIPP), and falling foul of the rules could land you with a 55% tax bill.

While you can use SIPPs to buy commercial property, there are strict regulations around what is classed as such, and you would have to sell any premises that are to be converted for residential use before they are ready to be occupied.

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About the author

Pete, an expert in all things mortgages, cut his teeth right in the middle of the credit crunch. With plenty of people needing help and few mortgage providers lending, Pete found great success in going the extra mile to find mortgages for people whom many others considered lost causes. The experience he gained, coupled with his love of helping people reach their goals, led him to establish Online Mortgage Advisor, with one clear vision – to help as many customers as possible get the right advice, regardless of need or background.

Pete’s presence in the industry as the ‘go-to’ for specialist finance continues to grow, and he is regularly cited in and writes for both local and national press, as well as trade publications, with a regular column in Mortgage Introducer and being the exclusive mortgage expert for LOVEMoney. Pete also writes for Online Mortgage Advisor of course!

Read more about Pete

Pete Mugleston

Mortgage Advisor, MD

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