More than one million older homeowners have taken out “ultra-long” mortgages in the past three years, creating a potential risk as they will still be paying off into retirement.
The fastest growing group of people taking out mortgages beyond state pension age is those aged under 40, many of whom are first-time buyers.
Longer mortgage terms help make monthly repayments more manageable against a backdrop of high interest rates – but experts warn that having mortgage debt in retirement leaves people at risk of poverty in old age.
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That has been helpful for much of this year due to high mortgage rates, while the Bank of England's latest Financial Stability Report warns that around 2.7 million homeowners coming off deals by the end of 2027 will see their monthly repayments rise by almost £150.
The cost of borrowing has been falling in recent months, with interest rates cut to 5% in August and 4.75% in November, that has pushed mortgage rates lower and below 4% in some cases.
But that doesn't appear to be supporting mortgage terms.
A Freedom of Information (FOI) request to the Bank of England, by Sir Steve Webb, a former pensions minister who is now a partner at pensions consultancy LCP, suggests the number of people who will still have a mortgage in retirement is set to remain high even with pricing dropping.
“There is increasing evidence that taking out a mortgage which runs past pension age is an entrenched feature of the mortgage market rather than a temporary blip," says Webb.
"This has profound implications for retirement planning, as it is likely to mean that savers may end up using up already inadequate pension pots to clear a mortgage balance.
"Anyone involved in helping today’s workers plan for their retirement must now factor in the possibility that housing costs will run into retirement or will have to be funded from already meagre pension pots."
Ultra-long mortgages
In the fourth quarter of 2021, 88,933 new mortgages were taken out where the term ran past the homeowner’s state pension age. This represented 31% of all mortgages.
A year later, 113,916 ultra-long home loans were taken out, representing 38% of all mortgages.
By the last quarter of 2023, the figure had dropped to 91,394 – but the proportion had risen to 42% of all new mortgages.
As of the second quarter of 2024, the research shows more than two in five of all new mortgages had terms which run past pension age.
The data also shows that it is young homeowners who are increasingly choosing long mortgage terms.
Over the past year, 35% more under-30s have taken out mortgages that will go past the state pension age, dropping to 23.5% for 30 to 39-year olds and 12.9% for those aged between 40 and 49.
The surge in young people taking out long mortgage terms is a response to soaring interest rates. By stretching the number of years you have to repay the loan – say, to 30 or 40 years – it lowers the monthly mortgage payment.
Mortgage rates are much higher now than they were at the end of 2021, and many lenders have hiked rates over the past month.
The average two-year fixed residential mortgage rate is currently 5.52%, according to Moneyfacts, while the average five-year fixed-rate deal is 5.28%.
The impact on retirement
So, what does this all mean for people’s retirement prospects?
Webb said he’s worried that if homeowners still have a mortgage balance at retirement, “their instinct will be simply to tip out their (already inadequate) pension pots to clear the mortgage balance”.
He added: “We already know that millions of people are not saving enough for their retirement and if some of that limited retirement savings 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.”
Not all of these homeowners will still have repayments to make when they come to retire. Their income may rise, they may move house, and they could swap their long-term mortgage for a shorter one.
They may also choose to overpay their mortgage, effectively paying it off quicker.
Meanwhile, some homeowners may work into their retirement and past state pension age, meaning they will still have income to service their mortgage.
However, Webb said there are still risks. For example, in the past, people mostly paid off their mortgage before pension age, so they could spend their final years in work boosting their pension pot. “Even if mortgages only run to pension age (and not beyond), it deprives people of a period pre-retirement when they might have paid off their mortgage and be able to boost their pension.”
Take someone on a salary of £25,000 a year. If they pay the standard auto-enrolment contributions (5% employee, 3% employer) from the age of 22, they could build up a total retirement fund of £461,000 by the age of 66. This assumes 3.5% salary growth per year, 5% a year investment growth and a 0.75% annual charge.
However, topping up contributions by 4% for 10 years from the age of 55, the age at which a 25-year mortgage term taken out at the age of 30 would be paid off, could result in a total pot of £513,000 – £52,000 more than if no tops-up were made, according to Standard Life.
There is also the issue of working into retirement. While young homeowners may assume they’ll work into their 70s, they don’t know for sure that they will be healthy enough to do so.
Growing numbers of people have dropped out of the labour market before reaching pension age in recent years.
How to make your mortgage more affordable
Overpaying your mortgage can be a great way to reduce the mortgage term and amount of interest you have to pay.
For example, someone who borrowed £200,000 over 25 years on a 3% mortgage rate would pay £948 a month. Overpaying by £200 a month would save them around £21,620 in interest and mean they pay off the mortgage six years earlier than planned.
Someone with the same mortgage on a 6% rate could make a saving of £32,017 by overpaying £100 a month.
Most lenders allow customers on fixed mortgage rates to make overpayments of up to 10% of the outstanding balance in a year.
If you pay more than this, you could be hit with an early repayment charge.
Use our mortgage overpayment calculator to see how using some spare cash to overpay could affect your mortgage.
It’s also a good idea to review your mortgage term. You can do this every time you take out a new deal.
If your income has increased, or your outgoings have fallen - for instance, your children may have started school and you don’t have nursery bills to pay anymore - consider reducing the term so it doesn’t run into your retirement. Decreasing the mortgage term will increase your monthly payments.
On the other hand, if you’re struggling to make your payments each month, you could consider extending the life of your mortgage. The typical mortgage term is 25 years, but 30 and 40-year terms are now available.
Increasing the term will lower the payments and make them more affordable.
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