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

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

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

It suggests that more than a million new mortgages have been issued in the last three years, with end dates beyond state pension age.

The former Liberal Democrat MP, who is now a partner at consultancy firm LCP, expressed fears that borrowers could be forced to raid their pension savings to pay off their mortgages in a worst-case scenario.

Sir Steve saw the potential for harm in any case, as long-term mortgages deprive people of a period before retirement when they could be mortgage-free and boost their pension.

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

The number was 38% in the same period of the previous year.

Latest Money: My employer wants to pay me by the minute – what can I do?

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

Those under 30 accounted for 3,676 of those mortgages.

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

Mortgage rates have been rising since the end of 2021, when the Bank of England began measures to combat rising inflation.

Taking out housing loans with longer terms tends to be more attractive when interest rates are high, as monthly repayments are lower.

Sir Steve said: “The huge number of mortgages going beyond State Pension Age is shocking.

“The challenge of getting on the housing ladder is forcing a large number of young homebuyers to gamble on 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 part of that limited retirement savings has to be used to pay off a mortgage balance in retirement, they will be at an even greater risk of poverty in old age.

“Mortgage lenders need to be asked serious questions about whether this loan is truly in the borrower’s best interest.”

The FCA’s responsible lending rules require lenders to take into account future changes to income and expenses, such as the borrower’s retirement, when this would be expected to happen during the term of the mortgage.

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

“Along with longer terms, we are also seeing a higher proportion of mortgages projected to mature close to state pension age,” she said.

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

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

She said building societies recognize the need to consider different sources and needs of income and expenditure, different lifestyle risks and different capabilities to withstand financial shocks, adding: “With borrowers expected to hold debt for longer time, now is the time to ask yourself about the products and services you will provide to these borrowers to responsibly meet their needs and help them achieve their financial goals – what will you need to do to support this growing customer population? and get good results?

“Doing this right will obviously benefit these individual clients, allowing them to meet their housing needs later in life and move out if that is their goal.

“It can also support first-time buyers with an increase in housing supply.”

Karina Hutchins, director of mortgage policy at lenders body UK Finance, said: “The proportion of long-term mortgages has been rising in recent years as buyers look for ways to increase their affordability.

“When considering new mortgage applications, lenders will act in accordance with the responsible lending rules set out by the Financial Conduct Authority and will carefully consider whether the borrower will be able to repay their mortgage in the future.

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

“When this is the case, it is common practice for creditors to request proof of pension. Those who are closer to retirement, usually within 10 years, may need to convince their lender that they can pay the mortgage based on their retirement income.

“Although longer mortgage terms may offer lower initial monthly payments, the borrower will pay more interest and have less income available to invest in their pension if the mortgage lasts its full term.

“We encourage customers to speak to an independent mortgage advisor to discuss the best options available for their specific circumstances,” she concluded.