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Over 40s put retirement at risk with spike in 35-year mortgages
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Shekina TuaheneA rise in the number of borrowers over 40 taking out mortgages with terms of 35 years or longer is putting their quality of life in retirement at risk, data suggests.
In the first two months of the year, 478 mortgages with terms of 35 years or more were sold to people aged over 40, figures obtained by Quilter revealed.
The wealth manager and pension provider estimated that this figure will rise to over 3,039 sales in 2022, marking a 39% rise compared to 2021 when 2,191 mortgages with terms of 35 years or more were sold to the over 40s.
This would also be a significant rise on the 570 sold in 2020.
Apart from a peak in 2018 after later life remortgages and other loan types were introduced to the market, current volumes are at their highest for a decade.
Quality of life in retirement
Quilter suggested there may be many reasons why people of this age might take out longer term mortgages, but cited rising house prices as the main cause as extending mortgage terms can help to reduce the size of monthly payments.
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The firm said that as someone aged 41 would be at least 76 by the time the mortgage is paid off, there was a risk that monthly repayments could limit their disposable income and subsequently their quality of life in older age.
Further, with mortgage interest rates now at 6% on average, borrowers taking out mortgages will be paying some of the highest interest rates seen in more than a decade.
A 250,000 mortgage on a 35-year term matching the current base rate at 2.25% would see monthly repayments of £861. However, on an interest rate of 6%, monthly repayments would hit £1,426.
By comparison, the full state pension is currently £185.15 a week, or around £800 a month. Quilter said although this is likely to rise over the 35-year period, so will the cost of living, making it unlikely that retirees will have enough income to cover their mortgage payments and living expenses. As such, this will make them more reliant on savings.
Older borrower shift
Karen Noye, mortgage expert at Quilter said that the increase in mortgages with 35-year terms had typically been seen among younger buyers, but since the pandemic, it had started to shift to older borrowers.
Noye said: “While this is not inherently wrong, it does have the potential to stretch people’s finances later in life.
“While the sales remain in the hundreds for now, as opposed to the thousands sold each month to people in younger age groups, the spike is concerning nonetheless. For those people considering entering into a mortgage that will see them well into retirement, it is vital they think ahead and are aware of the potential risks.”
Noye said people borrowing into retirement should consider whether paying a mortgage would have an impact on their standard of living.
“For many people, a high monthly mortgage repayment will not be conducive with their retirement savings, meaning their standard of living could be negatively impacted and they may not be able to comfortably afford their repayments.”
Higher interest costs
Noye said while longer mortgage terms could mean lower monthly repayments, borrowers were likely to pay “considerably more” in interest over the course of the mortgage term.
She said: “While there are several risks to consider, a longer mortgage term does not always spell bad news. Certain types of mortgage products allow you to make overpayments which could help to make repayments past retirement age more manageable. Overpaying can also help to reduce the amount of interest paid by decreasing the overall term length.
“If you are considering committing to a mortgage for 35 years or more, it is important to seek professional financial advice where possible.”