Earlier this month, data from UK Finance showed signs that the use of longer mortgage terms had been pushed to the limit, as a fifth of first-time buyers in 2023 had loans of 35 years or more.
However, with people getting onto the housing ladder in their early-to-mid-30s on average, there is a chance that they will still be paying off their mortgage well into retirement age.
Speaking to Mortgage Solutions, Adam Wells, co-founder of Lloyd Wells Mortgages, said his firm was seeing a rise in extended mortgage terms, with a “significant” number of people intending to take this into their expected retirement age of between 67 and 70.
Wells said this was partially because current cash flow was seen as “more important than overall cost”.
“With the cost-of-living crisis, people would rather have the lowest monthly payment, even if this costs them more over the term of the mortgage,” he added.
Lewis Shaw, owner of Shaw Financial Services, said it aligned with house prices outstripping wages and added that longer mortgage terms sometimes allowed for larger loans.
He said that elevated, stubborn inflation and higher mortgage rates had “turbocharged the number of borrowers – particularly, although not exclusively, first-time buyers, who are forced into longer terms due to the increased cost of repayments along with the generally increased cost of living that affects us all.”
Shaw said this was pushing mortgages “way past the state retirement age of up to 75 in many cases”.
Dealing with today’s challenges
Backing Wells’ observation, brokers said borrowers were thinking in the here and now.
John Yerou, managing director of Mortgage Quest, said both buyers and remortgagors were going for longer mortgage terms to fit affordability, even though this meant paying more in interest. He added: “What’s the alternative? To sell your house and rent?”
He said when first-time buyers found out the repayments of a 25-year mortgage, they felt it was a “stretch” that would leave them “eating fish fingers and baked beans just to have a roof over their heads. You don’t want people to live like that”.
Yerou said if interest rates fell in the future, there was always the flexibility to shrink the mortgage term.
“When you have a 30- or 35-year mortgage term, it doesn’t necessarily mean you have to stick to that. Some of them will go on a two- or five-year fixed rate, and when they come to renew their mortgage, it’s an opportunity to review their situation,” he added.
Yerou said: “One may say, what’s the plan in 30 years? Thing is, although mortgage brokers have financial acumen, we’re not IFAs, so if someone is renting and has the opportunity to get onto the property ladder, then you have to come up with something.”
A short-term solution
While a longer mortgage term raises questions as to how people will continue to afford mortgage payments, brokers said borrowers did not always see this as a permanent scenario.
On one hand, some borrowers have considered that they may continue working, with Faye Richards, director of Faye Richards Private Finance, saying clients appeared to be “fairly relaxed around retirement age, with many expecting to work beyond this”.
Others had a more immediate vision, she said, as they saw this as a “short-term measure” that allowed them to settle into a property or adjust to higher payments after refinancing.
“Most clients do not expect to keep the term until it expires but, instead, through potential pay rises and bonuses, overpay on the mortgage to ensure it is paid off quicker. If they are purchasing a larger family home, then the expectation is that they are likely to downsize in the future,” she added.
Richards said clients were also happy to see how much payments would be on a shorter term and the impact of making overpayments, saying people were “generally motivated to pay the mortgage off as quickly as possible”.
Wells added: “Most people don’t intend to be in their first homes for more than five years, and therefore they see this a stopgap until they do buy their forever home, at which point they expect their income to be higher and they can start making inroads into repaying the mortgage.”
For older clients, Wells found those who wanted to borrow up until they were 75 or 80 said “when they do retire, or receive inheritance from their parents, they will sell the property and buy a retirement property outright”.
He added: “There is also a thought that by the time they reach their state pension age of 68, they may only have £50,000 remaining on their mortgage, and therefore they don’t mind spending £250 per month of their pension on any remaining mortgage.
“We have to make the clients aware that this is a long-term investment, though, and they are liable for the entire debt over the entire term.”
Wells said it might not be a problem today, but unexpected life events could leave people unable to sell their home, or they may find their pension “isn’t what they expected, and they may be left unable to repay their mortgage”.
Lloyd Wells makes borrowers aware of this risk in its suitability letters.
A lack of forethought?
Shaw said this trend raised “worrying questions” as his clients assumed “wages will rise, interest rates will fall and many point to the prospect of inheritance to help clear a mortgage balance in the future”.
He asked: “What happens if wages don’t increase? What if mortgage rates don’t fall by the expected amount, and what if house prices stay where they are? Moreover, what if their outgoings increase?”
Shaw said some people, particularly first-time buyers, did not consider that their living expenses would rise and their incomes would fall once they became parents.
“As a species, we’re exceptionally bad at planning for the future. We have all sorts of cognitive biases working against us, and we often assume things will be better than they are. While the plan may be to reduce the term over time with the thoughts of that promotion or because rates fall and, therefore, the mortgage payment will go further, it often doesn’t come to fruition,” he added.
He said inheritances were “the elephant in the room” as many did not plan properly for retirement, and the lack of defined benefit pension schemes was one of the main reasons for “an explosion in equity release and lifetime mortgage advice”.
Shaw said: “Retirement savings aren’t what they once were. Therefore, more homeowners are turning to their property as an asset to supplement their income. That was before the cost-of-living crisis made everything worse.
“With that trend set to continue, many borrowers may find that the inheritance cupboard is bare when it comes time. Furthermore, as people take out ever larger and longer mortgages, it takes away from their own ability to save for retirement.
“I fear when these chickens come home to roost in a generation’s time, we could be in for one hell of a rude awakening.”
