Ultra-long mortgages push buyers past retirement

More than a million mortgages have been issued in the last three years, with some buyers still having to pay them back into retirement.

The latest data shows that two in five new mortgages have terms that allow homeowners to continue making payments in retirement.

Ultra-long or extended mortgages are becoming increasingly popular during times of higher interest rates as people look to spread costs.

But that ultimately makes the loan more expensive, and experts say it raises serious questions about financial planning for retirement.

According to Bank of England data obtained by pensions consultancy LCP, around three in 10 mortgages had been paid off by retirement age at the end of 2021.

This share grew as interest rates rose. Although interest rates have declined from their peak, LCP said the trend appears to have continued.

“There is growing evidence that taking out a mortgage beyond retirement age is an entrenched feature of the mortgage market and not a temporary blip,” said Steve Webb, a former pensions minister who is now a partner at LCP.

“This has profound implications for retirement planning as it is likely to result in savers potentially ending up using already inadequate pension holdings to pay down their mortgage balance.”

The temptation for young homeowners is obvious. A longer mortgage term would reduce monthly repayments.

But as the average age of first-time buyers rises – now almost 34 – the question of how people will be able to afford mortgage payments when they retire is becoming increasingly important.

According to UK Finance, the industry body for banks and lenders, only 3% of mortgage holders would currently pay off their mortgage after the age of 65.

While many young homeowners have opted for longer mortgage terms to make repayments more manageable, they may opt for shorter terms in the future if their salary improves or they move.

That’s why UK Finance expects that only a small proportion of mortgages taken out now will ultimately flow into borrowers’ retirement years.

However, there is also a risk that some people will have to work longer until their mortgage is paid off or decide to downsize.

Lenders are relatively flexible when it comes to allowing people to take out these longer-term mortgages, but there are restrictions, according to David Hollingworth of mortgage broker L&C.

“There are often maximum age limits at the end of the mortgage term and lenders need to be sure that the borrowing is affordable,” he said.

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“To do this, borrowers must prove that their income after retirement is adequate.”

After the financial crisis almost 20 years ago, affordability tests became stricter and lenders had to prove that mortgage applicants could cope with rising interest rates.

The reality is that for many people, taking out a mortgage of any kind remains unaffordable.

Data released earlier this week shows the dynamics of renting and owning and their impact on financial stress and life satisfaction.

“The proportion of people renting privately has doubled in the 2000s, and while it has leveled off at around a fifth of households or a third in London, we are seeing people renting later in life,” said Sarah Coles from investment platform Hargreaves Lansdown.

“Even when people are in their late 50s and early 60s, 11% still live in private rented accommodation.”