A former pensions minister has warned that young home buyers are being forced to risk their retirement prospects by taking on ultra-long mortgages, in what he describes as a 'shocking' trend.
Freedom of information (FOI) data from the Bank of England reveals that 42% of new mortgages in the last quarter of 2023 equating to 91,394 had terms extending beyond the state pension age. This is a significant increase from the same period a year earlier when 38% of new mortgages had a term ending beyond state pension age, and even more so from the same period in 2021 when it was just 31%.
The figures were obtained by Sir Steve Webb, a former Liberal Democrat pensions minister who is now a partner at LCP (Lane Clark & Peacock). He suggests that based on these figures, over the last three years, more than one million new mortgages have been issued with end dates beyond the state pension age.
In the final quarter of 2023, people aged between 30 and 39 accounted for 30,943 new mortgages lasting beyond state pension age, while those aged 40 to 49 accounted for 32,305. Under-30s made up 3,676 of these mortgages, people aged 50 to 59 accounted for 18,854, those aged 60 to 69 made up 4,955 and people aged 70-plus made up 661.
Sir Steve has raised concerns that some individuals may struggle to keep up with mortgage payments after retirement, potentially dipping into their pension savings to settle their mortgage and leaving them with less to live on in their twilight years. The information was derived from mortgage data provided by the Financial Conduct Authority (FCA) to the Bank of England.
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While a mortgage taken out in one's 30s, possibly as a first-time buyer, is unlikely to be their final mortgage, the risk to retirement depends on what transpires during their working life and whether they can reduce the term, according to Sir Steve. He pointed out that in the past, when most people had largely paid off their mortgage before reaching pension age, they could use their last working years to bolster their pension savings.
Even if mortgages only last until pension age, it robs people of a period leading up to retirement when they could be mortgage-free and enhancing their pension, he added. He also noted that some individuals will have exited the workforce before reaching their pension age.
In addition to making overpayments whenever possible to decrease the size of a mortgage, some people might choose to downsize to a smaller property or resort to equity release to unlock cash in their later years. However, there are factors to consider with equity release, such as the amount of money that will be left for an inheritance.
Many would-be homeowners are possibly counting on an inheritance to help them eventually clear their mortgage. Sir Steve said: "The huge number of mortgages which run past state pension age is shocking. The challenge of getting on the housing ladder is forcing large numbers of young home buyers to gamble with their retirement prospects by taking on ultra-long mortgages."
"We already know that millions of people are not saving enough for their retirement and if some of that limited retirement saving has to be used to clear a mortgage balance at retirement they will be at even greater risk of poverty in old age. Serious questions need to be asked of mortgage lenders as to whether this lending is really in the borrower's best interests."
Speaking at the Building Societies Association (BSA) last week, Emily Shepperd, FCA chief operating officer, said: "Alongside longer terms we also see a greater proportion of mortgages projected to mature around state retirement age. The projected median age of a first-time buyer at maturity is now 65 years old, up from 56 in 2005."
"The proportion of mortgage customers over 67 is currently less than 2% of all loans. By 2040 this rises to 5%, and by 2050 it is almost 10%. Lending into retirement is moving from a niche to a norm."
She highlighted the evolving needs of borrowers, stating: "With borrowers projected to hold debt for longer, now is the time to ask yourself about the products and services you will provide to those borrowers to meet their needs responsibly and help them meet their financial goals what will you need to do to support this growing population of customers and deliver good outcomes? ".
"Getting this right will of course benefit those individual customers, enabling them to meet their housing needs in later life, and move if that is their aim. It may also support first-time buyers with an increase in the supply of homes."
The Bank of England's Financial Policy Committee (FPC) had observed last autumn that there was a notable rise in the proportion of new mortgage lending with terms extending to 35 years or more, jumping by eight percentage points to 12% by the second quarter of 2023.
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Furthermore, the FPC pointed out that while longer mortgage terms and other measures of leniency might ease the immediate financial strain on borrowers, they could lead to greater debt burdens in the long run.
The Financial Conduct Authority's responsible lending rules, which require lenders to consider future changes in income and expenditure, such as retirement, during the mortgage term, have somewhat mitigated the potential risks from extended debt burdens, according to the committee.
Mortgage rates have been gradually increasing in recent weeks, as lenders adjust their expectations regarding a base rate cut. Financial information website Moneyfacts reported that the average two-year fixed homeowner mortgage rate was 5.94% on Friday, a slight increase from Thursday's 5.93%.
Property firm Savills recently predicted that property values across Britain are expected to rise by just over a fifth (21.6%) on average by the end of 2028. They forecasted that the average house price could rise by £61,500, from £285,000 in 2023 to £346,500 by 2028.
Karina Hutchins, UK Finance principal for mortgage policy, commented: "The proportion of longer-term mortgages has been increasing in recent years as buyers look for ways to stretch their affordability. When reviewing new mortgage applications, lenders will act within the responsible lending rules set by the Financial Conduct Authority and carefully consider whether the borrower will be able to afford their mortgage in the future."
"This will include whether the requested term would take the borrower beyond their anticipated retirement age. Where this is the case, it is common practice for lenders to request proof of pension. Those closer to retirement, usually within 10 years, may need to satisfy their lender that they can afford the mortgage based on their retirement income."
"Whilst longer mortgage terms can offer lower initial monthly repayments, the borrower will pay more in interest and have less disposable income to put into their pension if the mortgage runs for its full term. We would encourage customers to speak to an independent mortgage adviser to discuss the best options available for their specific circumstances."
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