The rise of the 40-year mortgage and the dangers for homeowners
Longer mortgages will mean millions of Britons will be still paying off their homes after they’ve reached retirement age, writes James Moore. With sky-high house prices is there any other solution?
Once upon a time, Britons hoped to be rid of their mortgages sometime in their fifties, ahead of a smooth path to retirement. That increasingly looks like a fantasy.
A freedom of information request by former pensions minister Steve Webb has revealed that an increasing number of young people are going to be worrying about making repayments into their dotage.
Webb, now a partner with pension consultant Lane Clark & Peacock, sought to track the proportion of new mortgages beyond the state retirement age, currently 66, in the wake of the recent publication of the Bank of England’s financial policy report. It showed that 42 per cent of new mortgages in the final three months of 2023 were like this. Webb’s FOI found that compares to less than a third (31 per cent) in the fourth quarter of 2021.
He also found that there were nearly 300,000 home loans of this type advanced in the final quarters of 2021, 2022, and 2023 combined. Given where the housing market is after 14 consecutive interest rate rises, it is quite possible that this sort of loan will become the rule not the exception in the near future.
It isn’t only first-time buyers who are affected. Many existing property owners have extended the terms of their loans to cope with the sharp rise in bills they faced when cheap fixed-rate mortgage deals, taken out during the time of rock bottom interest rates, expired.
But does this really mean the nation’s grandparents will be more concerned with fending off bailiffs and leaving the heating off to make their mortgage repayments than with the price of Saga’s latest cruise offerings?
I spoke to a contact at a major lender who had dug into the issue and made the case for the defence. The traditional view is that a mortgage lasts for 25 years. However, they pointed out that there is no law or regulation that says it has to be like this and just as some people now take out mortgages for 30 or 35 years, there are others who choose lesser terms, of perhaps 20 years. The latter may be rare today but it was less so when base rates were still close to zero.
Mortgages are also traditionally at their most onerous when homeowners are starting out, gradually declining as a proportion of household income as borrowers’ wages rise and they move into better jobs. By the time someone retires, the end should be in sight, at which time the burden of repayments should be relatively light. Lenders, my source said, already conduct extensive affordability checks. In the case of this type of loan, these will naturally encompass a prospective borrower’s retirement planning.
They also stressed that borrowers typically have the option to over-pay mortgages with the aim of seeing them off earlier. Many people take up this option, perhaps if they come into an inheritance or after interest rates fall, which they are expected to do over the next couple of years. Remember too, that many people never get to become owner-occupiers. These people have always had to find rent from their pensions. So all good, move along, nothing to see here?
Wait, what if the retirement planning of this relatively new cohort of borrowers goes awry? Don’t pretend that couldn’t happen. Saving for a pension isn’t, after all, the first thing on your mind if you run into the financial buffers. Or if you start having children. Or if your health takes a turn for the worse.
Said Webb in a tweet: “There’s growing awareness of the risk of renting in retirement but today a new FOI submitted by@LCP_Actuaries shows 1 million new mortgages in (the) last 3 years will run past pension age. Young having to risk retirement prospects to get onto housing ladder?”
Longer term mortgages inevitably mean (much) more expensive mortgages, a point made by Nick Mendes, from broker John Charcol.
“By opting for a longer mortgage term, borrowers can reduce their monthly payments, thereby easing their immediate financial burden. However, this benefit comes at a cost: the total interest paid over the life of the mortgage increases because the principal balance decreases more slowly over a longer period,” he says.
Borrowers need to be very clear about the risks they are exposing themselves to before contemplating paying off a mortgage into their mid to late 60s. “There is growing concern about how well mortgage holders are preparing for retirement,” Mendes notes.
The problem with long-term financial products is that it can be years before potential problems become clear. Slow-burn scandals that suddenly blow up are a recurrent feature of financial services in Britain: pension misselling, risky home income plans, payment protection insurance. The list goes on.
The gestation period for a potential pensioner mortgage crisis will be very long because these are such long-term mortgages. It may be 30 years or more before any pigeons come home to roost.
Will a cohort of older homeowners who didn’t or weren’t able to plan properly for their retirements really be turfed out of their homes in the 2050s? This is the nightmare scenario and it may not happen. But the risk is clearly there.
There is, of course, a cure for this modern-day financial malady: Build... More... Homes. More affordable homes would mean cheaper house prices and fewer people having to maintain huge debt burdens while worrying about mortgages post-retirement. How long do we have to keep saying this before someone in our political class takes up the cudgels?
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