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If you are looking to buy a home, it is important to know how your mortgage lender will view pension contributions and whether they will have an impact on your maximum borrowing.
In this guide, you will learn what effect your pension payments can have on mortgage affordability, and what to do if you’re concerned about it disrupting your plans.
How do pension contributions affect mortgage applications?
Some mortgage lenders will take into account your pension contributions when it comes to calculating your affordability, reducing the amount you can borrow.
This is not to say that you should cancel any voluntary pension contributions to boost the amount you can borrow - this could actually make it appear as though you are manipulating your income and could be construed as mortgage fraud. If you want to know how your pension contributions affect the amount you can borrow, speak with a mortgage specialist.
Sudden increases in pension contributions may give mortgage lenders pause if they are not accompanied by a significant increase in income. Mortgage companies might believe that the increased contribution is an indication of your intent to retire soon, and this can make them more reluctant to approve your application. For this reason, it's important to disclose pension changes during any mortgage underwriting discussions.
The Financial Conduct Authority (FCA) believes that borrowers should not be penalised for saving towards their financial future. However, mortgage lenders should consider the potential future impact on affordability when considering pension contributions.
Do all mortgage lenders have the same stance on pension contributions?
Surprisingly, no, there is no single view that mortgage lenders take when it comes to pension contributions.
Some lenders may see that your pension contributions are deducted from earnings and will count them as income, while others won't. Others don’t factor it into their calculations at all because of how pensions gradually contribute over time and only provide benefits after many years of service.
A few things to remember during the process:
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You should always disclose any changes in income or pensions when applying for a new mortgage agreement.
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If you want to contribute towards a pension but not reduce the amount you can borrow from lenders, then consider opening an additional ISA account instead.
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If you are considering making voluntary pension contributions, it may be worth discussing this with your mortgage broker.
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If you are considering withdrawing money from a pension, speak to your mortgage broker about the impact this might have on affordability for mortgage purposes
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You may also want to consider obtaining advice from a financial adviser before making any changes to pensions arrangements in order to ensure that you understand all the implications and risks involved with doing so.
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What to do if you’re concerned about pension contributions impacting your mortgage plans
Pension contributions can be complicated when it comes to applying for a new mortgage agreement as they affect how much cash is available within your account - which in turn affects what lenders are willing or able to grant under certain circumstances.
However, there are ways around this if you're looking at saving towards retirement too. It's important that any changes made (such as increased pension contributions) are disclosed to your lender during any mortgage underwriting discussions.
This information does not take into account your personal financial situation nor should it be relied upon when making decisions about how much home you can afford; speaking with an experienced mortgage broker that understands your current situation would give more accurate results in regards to what kind of mortgage product is the best for you.
At Teito, we're a truly independent online brokerage working with hundreds of lenders. Our application process is streamlined and stress-free and gives you the option to access expert advice from a broker who specialises in mortgage affordability at any time - get started here.
FAQs
Yes, absolutely. If your pension has started paying out, mortgage lenders will consider it one of the safest forms of income for borrowers to declare on a mortgage application.
See our guide to getting a mortgage based on pension income to find out more.
Choosing an Adviser
Selecting a qualified and experienced mortgage adviser is of great importance. To choose a suitable adviser, evaluate their qualifications, experience, and reputation, and ensure they are regulated by the Financial Conduct Authority (FCA).
Read reviews from previous clients and make sure they provide a clear explanation of the products and services they offer, as well as the fees and charges associated with them.