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Ultra-long mortgages threaten retirement plans

Ultra-long mortgages threaten retirement plans
Emma Lunn
Written By:
Emma Lunn

A former pensions minister has warned that homebuyers are being increasingly forced to accept mortgage terms that mean they will still be paying their home loan beyond the state pension age.

Steve Webb, who now works for consultancy Lane Clark and Peacock (LCP), obtained mortgage data via a freedom of information (FoI) request.

It showed that more than a million mortgages that stretch beyond the borrower’s state pension age have been arranged in the past three years.

The figures show the proportion of mortgages arranged to last into retirement increased from 31% in the final quarter of 2021 to 42% in the same period last year.

Among 30-39-year-olds, who would typically be expected to be taking out their first mortgage, 30,943 home loans were arranged to last beyond state pension age, with 39% of those granted in the last three months of 2023. This compared with 23% two years earlier.

The figures were higher for 40-49-year-olds, with 32,305 new mortgages – or 57% of the market – arranged beyond typical retirement age. In 2021, the proportion was 42%.

Rising house prices and interest rates mean more borrowers are taking on ‘ultra-long’ mortgages of up to 40 years. A longer mortgage term means cheaper monthly payments – but increases the amount of interest the borrower will pay overall.

Figures from the Bank of England show that two in five borrowers had taken out loans that would run beyond the state pension age. The bank supplied figures for the final quarters of 2021, 2022 and 2023 showing all new residential mortgages issued in those periods.

‘Even greater risk of poverty in old age’

Analysing these figures, Webb warned that more than one million mortgages that went beyond pension age had been issued. This could cause problems when borrowers reach later life, as they will need to pay their mortgage out of their retirement income.

However, many borrowers may be able to shorten their initial mortgage term by overpaying or remortgaging to a mortgage with a shorter term when their income increases.

Webb said: “The huge number of mortgages that run past state pension age is shocking. 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.”

Related: Nearly two-thirds of workers retire before state pension age