The increasing trend of taking mortgages into retirement poses a significant challenge for financial planners, warns a former pensions minister.
With interest rates at a decade high, homebuyers are extending mortgage terms to reduce monthly payments. Consequently, a quarter of first-time buyers now opt for mortgages lasting 35 years or more.
At first glance, this seems manageable. A 30-year-old taking out a 35-year mortgage would have it paid off by retirement. However, data from Lane Clark & Peacock (LCP), obtained via a freedom of information request from the Bank of England, presents a more concerning picture for financial advisers.
Alarmingly, over 40% of new mortgages, including remortgages, extend beyond state pension age. What was once a ‘niche’ scenario, as described by the FCA, has become the ‘norm’. The proportion of these long-term mortgages has surged from just under a third at the end of 2021 to 42% by the end of 2023, with the fastest-growing group being those in their 30s.
One might think this is not a significant issue, assuming early mortgages can be refinanced to shorter terms before retirement. However, this assumption overlooks the reality that many are exiting the labour market early due to long-term illness. What happens to someone who falls ill in their late 50s with a decade or more left on their mortgage? While lenders may recover the debt through housing equity, the borrowers face severe financial strain.
A logical solution might be to clear the mortgage using pension savings. However, defined contribution pension pots are often insufficient for a comfortable retirement. If more people deplete their pensions to settle long-term mortgages, retirement living standards could significantly decline.
Even if mortgages end at pension age, problems remain. Historically, people paid off mortgages by their late 50s, freeing up funds to enhance their pension savings. If borrowing extends into their 60s, this crucial pension boost might never occur.
In many people's opinion, offering mortgages to 30-year-olds that extend beyond pension age is almost irresponsible. While remortgaging a 60-year-old with secure post-retirement income is one thing, predicting the pension income of today's thirtysomethings in 35 to 40 years is uncertain. How can lenders ensure these mortgages will be paid off?
Advisers may face clients with mortgages extending far beyond secure income periods. Part of their financial strategy might need to focus on shortening mortgage terms to prevent long-lasting debt, ensuring clients can save adequately for retirement without the burden of ongoing mortgage costs.
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