Millions to pay mortgages into retirement as under-30s take ‘ultra-long’ loans


More than one million people in the past three years have taken out new mortgages that they will still be paying off into retirement, figures obtained from the Bank of England suggest.

The data, acquired by former pensions minister Sir Steve Webb via freedom of information request, show that the fastest-growing group of people taking out mortgages that will last into retirement is the under-30s.

Homeowners aged between 30 and 49 made up the majority (69 per cent) of those signing mortgage deals taking them beyond the current state pension age of 66.

Meanwhile, with almost half (42 per cent) of new deals now taking borrowing past state pension age and around five million UK homeowners expected to remortgage by the end of 2026, it means millions of people now look set to be paying of mortgages into their late 60s and beyond.

It comes as mortgage rates have soared from an average two-year fix of just under 2 per cent in September 2021 to a high of 6.66 per cent less than two years later, in the aftermath of Liz Truss’s disastrous mini-budget.

Rising rates have squeezed household budgets, forcing many to extend the length of their mortgage terms to keep their monthly payments as low as possible.

Mr Webb said the trend means many borrowers will have to raid their pension savings to clear the mortgages after retiring, leaving them at risk of “poverty” in old age.

Figures show that in the last quarter of 2023, 91,394 new mortgages were taken out going beyond state pension age, accounting for 42 per cent of all mortgages.

This figure is up from 88,933, which equated to 31 per cent, 2021.

Sir Steve’s own extrapolation of the figures, which are based on mortgage data supplied by the Financial Conduct Authority (FCA) to the Bank of England, shows that over the past three years a million people are likely to have taken out loans that extend beyond state pension age.

Among the under-30s, the figure increased 139 per cent between 2021 and 2023.

“The huge number of mortgages which run past state pension age is shocking,” said Sir Steve, who is now a partner at pension consultants LCP.

“The challenge of getting on the housing ladder is forcing large numbers of young homebuyers 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.”

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

Even if mortgages only run to pension age, it “deprives” people of a period pre-retirement when they might have paid off their mortgage and be able to boost their pension, he explained.

In the past, mortgage terms of 25 years were typical among first-time buyers.

But now, with first-time buyers struggling to afford loans of this length, many have been forced to take out longer loans of up to 40 years.

This trend is coupled with the fact that first-time buyers are purchasing their first home later in life than they would have before.

Someone taking out a 40-year mortgage at 30 would not be set to pay it off until they reached the age of 70. In 20 years’ time, the state pension age is set to rise to 68, and it could then go up further.

Those who take out longer mortgages can remortgage later down the line and shorten their terms, but this will result in higher payments.

For example, a £200,000 mortgage at 4.5 per cent over 25 years will mean monthly repayments of £1,111, but at 40 years, the repayments will only be £899.

However, a longer repayment term means paying more interest overall.

In the above scenario, someone with a 40-year mortgage, will repay £200,000, plus total interest of £231,348. On a 25 year term, they will repay £200,000, plus total interest of £133,370.

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.

“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.”

The figures also suggested hundreds of homeowners over the age of 70 are still taking out mortgages each year.

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 50 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.

In a speech to the Building Societies Association (BSA) last week, Emily Shepperd, chief operating officer of the Financial Conduct Authority (FCA) 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 per cent, and by 2050 it is almost 10 per cent.

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

How to reduce the term of your mortgage

One way to reduce the term of your mortgage – if your lender allows it and you have the spare cash – is by making overpayments.

If you had a £100,000 mortgage, for example, which was set to run for 25 years at a mortgage rate of 4.5 per cent, then overpaying by £100 a month would reduce the term by six years. The overpayment would also save you £18,000 in interest over the life of the mortgage.

If you overpaid by £200 a month then the term would reduce by almost 10 years, while the overpayment saving would be more than £28,000.

Be warned, however, some mortgage providers do not allow any overpayments, although most will permit you to overpay 10 per cent of the amount you borrowed each year – so on a £100,000 mortgage you would be able to pay an extra £10,000 without incurring a fee.

The added benefit of making overpayments is that you can stop them at any time if your financial situation changes and you need to revert back to your previous regular payments.

A last thing to remember is that if you make an overpayment with the intention of reducing the term of the mortgage then make that clear to your provider as they will sometimes reduce the size of your future payments instead of decreasing the length of time you have left to pay.

By Chris Newlands

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