The long-life mortgage financial timebomb: Warning borrowers will struggle to make ends meet when they retire because of 35-year mortgages
- Borrowers will increasingly struggle when they retire, Sir Steve Webb said
- Those relying on state pensions may be unable to pay their mortgages
Steve Webb, former pensions minister and This is Money retirement columnist has sounded a warning over long-life mortgages
Growing numbers of people will struggle to make ends meet when they retire because of the increasing trend for 35-year-plus mortgage deals, a former pensions minister has warned.
Home loan repayments that stretch well past working age could mean hundreds of thousands of savers are tempted to raid their retirement pots to pay off the balance, This is Money columnist and ex Pensions Minister Sir Steve Webb said.
That would leave many relying on little more than a state pension – unlikely to allow them to maintain their living standards.
This means that families desperate to make their dreams of home ownership come true today could face a future financial timebomb.
Recent figures showed a record one in five first-time buyers are now taking out mortgages of more than 35 years – sometimes as long as 40 – as many stretch their finances to be able to buy.
With data suggesting that the average age of people getting onto the housing ladder is now in the 30s, that raises the prospect of many people still paying off home loans into their 70s.
This is Money’s True Cost Mortgage Calculator shows how changing the length of a mortgage term can lower monthly payments but dramatically increase interest costs over the life of the loan.
Sir Steve said: ‘There is a risk that growing numbers of people will reach pension age with an outstanding mortgage debt.
‘If they have to use their pension savings to clear the balance, this will leave them struggling to make ends meet in retirement.’
The former minister, now a partner at consultants LCP, said – based on the current rate of 19 per cent of first-time buyers taking out mortgages lasting more than 35 years – 65,000 to 70,000 people would be affected every year.
Over a number of years that will add up to hundreds of thousands of people.
With the current pension age of 66 rising to 67, people coming to the end of their working lives will face a choice.
‘You have got a £30,000 balance on your mortgage and £30,000 in your pension,’ he said. ‘People long to be mortgage-free.
‘You will almost certainly use your pension money first of all to clear the mortgage.
‘But people’s pension pots aren’t big enough in the first place with defined contribution payments. It’s not enough to cover a comfortable standard of living.’
The rise of longer mortgage terms risks pulling out a major support for retirement finances, as less pensioners will be mortgage-free
Figures earlier this year from Halifax showed that the average age for first-time buyers had risen to 32, up from 30 a decade earlier, as buyers take longer scraping together a deposit.
But there will be many buying above that age, Sir Steve pointed out, adding: ‘There is going to be a bunch of people buying in their late 30s.’
A spokesman for industry body UK Finance said: ‘Longer-term mortgages have become increasingly prevalent primarily amongst first-time buyers who are, typically, younger than home movers.
‘Of all 35-plus year mortgages out there, 72 per cent are held by first-time buyers.’