People who have opted for a 45-year mortgage have been warned over a “sting in the tail”. People who take out a £200,000 repayment mortgage at a rate of 4.5 per cent could expect to pay £1,111 a month on a 25-year term.
But more and more are opting for longer-term mortgages, with a 30-year term costing £1,013 a month, and £946 for 35 years, and at 40 it is £899 – £212 a month less than if they signed up for 25 years. But while over 25 years the borrower would pay £133,000 in interest, over a 40-year term, their total interest bill soars to £231,000 – £98,000 more.
The FPC warns that this trend “could affect future borrower and lender resilience”, adding that longer terms means “a higher risk of debt being pushed into old age” and reduced financial flexibility. That, in turn, could make borrowers “more sensitive to negative shocks”.
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According to freedom of information (FOI) data supplied by the Bank of England, 42% of new mortgages in the fourth quarter of 2023 – or 91,394 – had terms going beyond the 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).
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.”
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.”
