Young home buyers being forced to take on ultra-long mortgages

Young home buyers are being forced to gamble with their retirement prospects by taking on ultra-long mortgages, according to a former pensions minister.

According to freedom of information data supplied by the Bank of England, 42 per cent of new mortgages in the fourth quarter of 2023 – or 91,394 – had terms going beyond the state pension age.

In the same period a year earlier, 38 per cent of new mortgages had a term ending beyond state pension age and in the same period in 2021, 31 per cent of new mortgages went beyond state pension age.

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 said that, based on the figures obtained for the last three months of each year, this suggests that over the last three years over one million new mortgages have been issued with end dates beyond state pension age.

In the fourth quarter of 2023, people aged 30 to 39 accounted for 30,943 new mortgages lasting beyond state pension age and people aged 40 to 40 accounted for 32,305.

Under-30s made up 3,676 of these mortgages, people aged 50 to 59 accounted for 18,854, 60 to 69-year-olds made up 4,955 and people aged 70-plus made up 661.

Sir Steve highlighted concerns that some people may not be able to afford to service a mortgage once they retire and will raid their pension savings to clear their mortgage, leaving them with less to live on in old age.

The data was based on mortgage figures supplied by the Financial Conduct Authority (FCA) to the Bank of England.

Although a mortgage taken out in someone’s 30s, perhaps as a first-time buyer, is highly unlikely to be someone’s last mortgage, the risk to retirement depends on what happens over the course of their working life and whether or not they are able to shorten the term, Sir Steve said.

He said that, in the past, when people had mostly paid off their mortgage before pension age, they could spend their final years in work boosting their pension pot.

Even if mortgages only run up to pension age, it deprives people of a period running up to retirement when they could be mortgage-free and boosting their pension, he said.

He also said some people will have dropped out of the labour market before reaching their pension age.

As well as making overpayments as and when this is possible to reduce the size of a mortgage, some people may decide to downsize to a smaller property, or turn to equity release to free up cash in their later years. There are considerations to weigh up with equity release, such as the money that will be left behind for an inheritance.

Some borrowers may be hoping to receive an inheritance themselves to help them eventually clear their mortgage.

Sir Steve Webb, partner at pension consultants LCP 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.”

In a speech to 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 per cent of all loans. By 2040 this rises to 5 per cent, and by 2050 it is almost 10 per cent.

“Lending into retirement is moving from a niche to a norm.”

She said that building societies recognise the need to consider different income and expenditure sources and needs, different lifestyle risks, different capacity to weather financial shocks, adding: “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.”

Last autumn, the Bank of England’s Financial Policy Committee noted that since the first quarter of 2021, the proportion of new mortgage lending with a term of 35 years or more had increased by eight percentage points, to 12 per cent by the second quarter of 2023.

The committee also noted that while longer mortgage terms and other forbearance measures could reduce pressures on borrowers in the short term, they could increase debt burdens over the longer term.

Potential risks from the lengthening of debt burdens were mitigated somewhat by the FCA’s responsible lending rules, requiring lenders to take account of future changes to income and expenditure, such as the borrower retiring, where this was expected to happen during the mortgage term, the committee said.

Mortgage rates have been creeping up in recent weeks, as lenders have adjusted expectations over a base rate cut.

According to financial information website Moneyfacts, the average two-year fixed homeowner mortgage rate on Friday was 5.94 per cent, up from 5.93 per cent on Thursday.

Property firm Savills recently said that across Britain, property values are expected to have increased by just over a fifth (21.6 per cent) on average by the end of 2028.

It said the average house price could increase by £61,500, from £285,000 in 2023 to £346,500 by 2028.

Karina Hutchins, UK Finance principal for mortgage policy, said: “The proportion of longer-term mortgages has been increasing in recent years as buyers to 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.”