The financial time bomb of a longevity mortgage: Warn borrowers will struggle to make ends meet when they retire due to 35-year mortgages
- Borrowers will find it increasingly difficult as they retire, Sir Steve Webb said
- People who depend on the state pension may not be able to pay their mortgage
Steve Webb, former pensions secretary and retirement columnist This is Money, has warned against long-term mortgages
A growing number of people will struggle to make ends meet when they retire because of the rising trend for 35-year mortgages, a former pensions minister warned.
Home loan repayments that extend well past working age could lead hundreds of thousands of savers to be tempted to plunder their pension pots to pay the balance, said This is Money columnist and ex-Minister for Pensions Sir Steve Webb.
This would leave many dependent on little more than a state pension, which would probably prevent them from maintaining their standard of living.
This means that families desperate to fulfill their dreams of owning their own home could face a financial time bomb in the future.
Recent figures showed that one in five first-time buyers are now taking out mortgages with a term of more than 35 years – sometimes as long as 40 years – while many are stretching their finances to buy.
With data suggesting that the average age of people coming up the housing ladder is now in their 30s, that raises the prospect that many people will still be paying off their mortgages into their 70s.
This is Money’s True Cost Mortgage Calculator shows how changing the length of a mortgage term can reduce monthly payments but dramatically increase interest costs over the life of the loan.
Sir Steve: ‘There is a risk that more and more people will reach retirement age with outstanding mortgage debt.
‘If they have to use their pension savings to clear the balance, they will have trouble making ends meet with their pension.’
The former minister, now a partner at consultants LCP, said that – based on the current percentage of 19 percent of first-time buyers taking out a mortgage with a term of more than 35 years – 65,000 to 70,000 people would be affected each year.
In a few years this will increase to hundreds of thousands of people.
With the current retirement age rising from 66 to 67, people are faced with a choice at the end of their working life.
“You have £30,000 on your mortgage and £30,000 on your pension,” he said. “People long to be mortgage-free.
‘You will almost certainly first use your pension money to pay off the mortgage.
‘But people’s pension pots are not large enough for premium payments in the first place. It’s not enough to cover a comfortable standard of living.”
The rise of longer mortgage terms threatens to remove a major boost to retirement finances as fewer retirees will be mortgage-free
Figures earlier this year from Halifax showed the median age for first-time buyers had risen to 32, up from 30 years earlier, as buyers take longer to scrape together a down payment.
But there will be a lot of people over that age buying, Sir Steve noted, adding: ‘There will be a lot of people in their late thirties buying.’
A spokesperson for industry association UK Finance said: ‘Longer-term mortgages are becoming more common, particularly among first-time buyers who tend to be younger than movers.
‘Of all existing mortgages with a term of more than 35 years, 72 percent are in the hands of first-time buyers.’