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

Young homebuyers are being compelled to gamble with their retirement prospects by taking over ultra-long mortgages, in line with a former pensions minister.

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

It means that a couple of million new mortgages have been issued over the previous three years with finish dates past the state pension age.

The ex-Liberal Democrat MP, who’s now a associate on the consultancy agency LCP, voiced fears that debtors could possibly be compelled to raid their pension financial savings to clear their mortgage in a worst-case situation.

Sir Steve noticed the potential for hurt in any case, as longer-term mortgages deprive folks of a interval operating as much as retirement after they could possibly be mortgage-free and boosting their pension.

According to the Freedom of Information knowledge requested, 42% of latest mortgages within the fourth quarter of 2023 – or 91,394 – had phrases going past the state pension age.

The determine stood at 38% in the identical interval a 12 months earlier.

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In the ultimate quarter of final 12 months, folks aged 30 to 39 accounted for 30,943 new mortgages lasting past state pension age, whereas folks aged 40 to 49 accounted for 32,305.

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

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

Mortgage charges have been rising for the reason that finish of 2021 when the Bank of England started motion to deal with rising inflation.

Taking house loans with longer maturity dates tends to be extra enticing when rates of interest are excessive, as month-to-month repayments are decrease.

Sir Steve stated: “The huge number of mortgages which run past state pension age is shocking.

“The problem of getting on the housing ladder is forcing massive numbers of younger homebuyers to gamble with their retirement prospects by taking over 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 have to be requested of mortgage lenders as as to whether this lending is de facto within the borrower’s greatest pursuits.”

The FCA’s accountable lending guidelines require lenders to take account of future adjustments to earnings and expenditure, such because the borrower retiring, the place this was anticipated to occur in the course of the mortgage time period.

Emily Shepperd, the FCA’s chief working officer, admitted in a speech to the Building Societies Association final week that lending into retirement was transferring “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 stated.

“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 clients over 67 is presently lower than 2% of all loans. By 2040 this rises to five%, and by 2050 it’s nearly 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 debtors projected to carry debt for longer, now could be the time to ask your self concerning the services you’ll present to these debtors to fulfill their wants responsibly and assist them meet their monetary objectives – what’s going to you’ll want to do to assist this rising inhabitants of shoppers and ship 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 assist first-time consumers with a rise within the provide of properties.”

Karina Hutchins, principal for mortgage coverage at lenders’ physique UK Finance, stated: “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 purposes, lenders will act inside the accountable lending guidelines set by the Financial Conduct Authority and thoroughly think about whether or not the borrower will be capable of afford their mortgage sooner or later.

“This will include whether the requested term would take the borrower beyond their anticipated retirement age.

“Where that is the case, it is not uncommon apply for lenders to request proof of pension. Those nearer to retirement, normally inside 10 years, might must fulfill their lender that they will afford the mortgage primarily based on their retirement earnings.

“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 clients to talk to an impartial mortgage adviser to debate one of the best choices out there for his or her particular circumstances,” she concluded.