Lenders under scrutiny for increase in ultra-long mortgages

Former Pensions Minister Sir Steve Webb has raised concerns over the growing trend of young homebuyers taking on ultra-long mortgages, potentially jeopardizing their retirement prospects. In a shocking revelation, data provided by the Financial Conduct Authority (FCA) to the Bank of England shows that over a million new mortgages have been issued in the past three years with end dates extending beyond the state pension age.

Sir Steve, who is now a partner at the consultancy firm LCP, warned of the potential harm that these longer-term mortgages could have on borrowers. He pointed out that such mortgages deprive people of the opportunity to reach retirement age without the burden of a mortgage, which could have a significant impact on their pension savings. In a worst-case scenario, borrowers may be forced to dip into their pension funds to pay off their mortgage.

According to the Freedom of Information data requested, 42% of new mortgages in the final quarter of 2023 – amounting to 91,394 mortgages – had terms extending beyond the state pension age. This figure has increased from 38% in the same period a year earlier. The data also revealed that people aged 30 to 39 accounted for 30,943 of these mortgages, while those aged 40 to 49 accounted for 32,305. The number of under-30s taking on these mortgages stood at 3,676. Additionally, 18,854 mortgages were taken out by people aged 50 to 59, and there were 661 mortgages taken out by individuals over the age of 70.

The rise in mortgage rates since the end of 2021, when the Bank of England began measures to tackle inflation, has made longer-term mortgages more attractive as they offer lower monthly repayments. However, Sir Steve Webb emphasized the need for mortgage lenders to consider whether these loans are in the borrower’s best interests.

“The huge number of mortgages which run past the 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,” said Sir Steve. “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.”

The FCA’s responsible lending rules require lenders to consider any changes in income and expenditure, such as retirement, during the mortgage term. Emily Shepperd, the FCA’s chief operating officer, acknowledged in a recent speech to the Building Societies Association that lending into retirement is becoming more common. She also highlighted the need for lenders to provide appropriate products and services to support these borrowers and ensure good outcomes for them.

Responding to the report, Karina Hutchins, principal for mortgage policy at UK Finance, reassured borrowers that lenders carefully assess each application within the FCA’s responsible lending rules. She also advised borrowers to seek the guidance of an independent mortgage adviser to find the best options for their circumstances.

Justin Moy, managing director of EHF Mortgages, acknowledged the concerning nature of the data but also pointed out that borrowers have the opportunity to reduce their mortgage term in the future. He also noted that the state pension age is likely to increase over time, making this issue a relatively small one in the grand scheme of things.

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