‘Serious questions’ for lenders over surge in ultra-long mortgages

Young homebuyers are being forced to gamble with their retirement prospects by taking on ultra-long mortgages, according to a former pensions minister.

Sir Steve Webb described data – supplied by the Financial Conduct Authority to the Bank of England – as “shocking”.

It suggests that more than one million new mortgages have been issued over the past three years with end dates beyond the state pension age.

The ex-Liberal Democrat MP, who is now a partner at the consultancy firm LCP, voiced fears that borrowers could be forced to raid their pension savings to clear their mortgage in a worst-case scenario.

Sir Steve saw the potential for harm in any case, as longer-term mortgages deprive people of a period running up to retirement when they could be mortgage-free and boosting their pension.

According to the Freedom of Information data requested, 42% of new mortgages in the fourth quarter of 2023 – or 91,394 – had terms going beyond the state pension age.

The figure stood at 38% in the same period a year earlier.

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In the final quarter of last year, people aged 30 to 39 accounted for 30,943 new mortgages lasting beyond state pension age, while people aged 40 to 49 accounted for 32,305.

Under-30s made up 3,676 of these mortgages.

People aged 50 to 59 accounted for 18,854, and there were 661 who were over 70.

Mortgage rates have been rising since the end of 2021 when the Bank of England began action to tackle rising inflation.

Taking home loans with longer maturity dates tends to be more attractive when interest rates are high, as monthly repayments are lower.

Sir Steve 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 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.”

The FCA’s responsible lending rules require lenders to take account of future changes to income and expenditure, such as the borrower retiring, where this was expected to happen during the mortgage term.

Emily Shepperd, the FCA’s chief operating officer, admitted in a speech to the Building Societies Association last week that lending into retirement was moving “from a niche to a norm”.

“Alongside longer terms we also see a greater proportion of mortgages projected to mature around state retirement age,” she said.

“The projected median age of a first-time buyer at maturity is now 65 years old, up from 56 in 2005.

“The proportion of mortgage customers over 67 is currently less than 2% of all loans. By 2040 this rises to 5%, and by 2050 it is almost 10%.”

She said that building societies recognise the need to consider different income and expenditure sources and needs, different lifestyle risks and different capacity to weather financial shocks, adding: “With borrowers projected to hold debt for longer, now is the time to ask yourself about the products and services you will provide to those borrowers to meet their needs responsibly and help them meet their financial goals – what will you need to do to support this growing population of customers and deliver good outcomes?

“Getting this right will of course benefit those individual customers, enabling them to meet their housing needs in later life, and move if that is their aim.

“It may also support first-time buyers with an increase in the supply of homes.”

Karina Hutchins, principal for mortgage policy at lenders’ body UK Finance, 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,” she concluded.

Justin Moy, managing director of EHF Mortgages, said of the report: “Mortgages are currently taken over a longer period of time just to make them more affordable in the earlier years, while rates are higher and household costs are significant.

“On the surface this data is highly concerning but in practice there will be many opportunities to reduce the term at a more affordable time, as incomes improve and rates reduce, as rates mature and people move home or downsize. State retirement age is also likely to increase during this period, so this becomes a very small problem overall.”