Older Britons face a looming “retirement crisis” due to the rising trend of longer-term mortgages in the UK.
Bank of England staff have recently warned about potential financial stability risks associated with borrowing into retirement age.
In a blog post, Bank officials highlighted “risks which could build over time if the trend continues”. These concerns come as half of new mortgages in the first quarter of 2024 had terms of 30 years or longer, up from just 12 per cent in late 2005.
The blog post said: “Longer mortgage terms could affect financial stability by pushing debt repayments beyond retirement, where incomes are less certain. They allow borrowers to take on a higher level of debt relative to income and could cause greater debt persistence.”
The trend of longer-term mortgages has led to a significant increase in borrowing beyond the state pension age. During the first three months of this year, 42 per cent of new mortgage lending extended beyond the retirement age of 67, up from around a quarter before the Covid-19 pandemic.
This shift is attributed to spiralling house prices and stagnating incomes, pushing borrowers to take on ever-longer mortgages. The surge in ultra-long home loans is particularly noticeable among younger generations, with home ownership rates among those in their mid-20s to mid-30s falling by 20 percentage points since 2000.
Homeowners have been saddled with rising mortgage repayments
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Bank of England staff blame the trend on “rising interest rates, increased costs of living and higher house prices” contributing to less affordable mortgages. These factors have made it increasingly difficult for younger buyers to enter the property market.
Bank officials warn that longer mortgage terms could affect financial stability by pushing debt repayments beyond retirement, where incomes are less certain. This trend allows borrowers to take on higher levels of debt relative to income and could cause greater debt persistence.
Borrowers on longer-term mortgages will pay more interest over the life of their loans and reduce their loan-to-value ratios slower.
Additionally, these borrowers have less flexibility to extend terms in response to future interest rate shocks, potentially reducing their financial resilience.
The Bank’s staff noted that while lower monthly payments in the short-term may provide some financial security, there could be longer-term consequences for the economy.
They cautioned that “continued borrowing into retirement could provide challenges for mortgagors to continue to meet payments” due to lower or more uncertain retirement incomes.
Research from SunLife earlier this year found that of the two-thirds (68 percent) of over 50s that are homeowners, more than one in five (23 percent) are still paying off their mortgage.
While most (87 percent) of those with outstanding mortgages are still working, the research shows that 13 percent of those still paying off their mortgages are retired.
This means that of all retirees in the UK, one in 14 (seven percent) – the equivalent of just over 500,000 older people – may still be burdened with paying monthly mortgage payments
Despite the risks associated with longer-term mortgages, there are options available for older borrowers.
Retirement interest-only (RIO) mortgages allow borrowers to pay only the monthly interest until the last borrower dies or moves into long-term care. These products are suitable for those with guaranteed income, such as a salary-based pension.
Another option is a lifetime mortgage, which doesn’t require monthly payments. Borrowers can release cash from their home without moving out, receiving funds as a lump sum or drawing down as needed. However, the interest is added to the balance, potentially increasing the amount owed.
Katie Brain, a banking expert at Defaqto, explained that rates for RIO mortgages start around five to six per cent. She added that lifetime mortgage rates are “slightly higher than the best standard mortgages but broadly speaking they are the same as some mainstream mortgage rates”.
Older borrowers considering long-term mortgages should carefully weigh their options and seek financial advice. Downsizing to a smaller property could be an alternative, potentially reducing household bills as well.
Borrowing into later life can affect inheritance, so discussing plans with family members is advisable. The Bank of England notes that while risks associated with longer-term mortgages are currently limited due to lending restrictions, borrowers should remain cautious.
Brain suggests that more competitive rates for older borrowers may emerge if the Bank of England base rate decreases further. However, it is crucial to consider the long-term implications of carrying mortgage debt into retirement.
Ultimately, older Britons must carefully assess their financial situation and future income prospects before committing to long-term mortgage debt, to avoid potential financial instability in their retirement years.