Rise in mortgage terms beyond state pension age

Mortgage terms are getting longer and many buyers could still be paying off their mortgage in retirement, according to new data.

High house prices combined with inflated borrowing costs and strict affordability criteria mean that more and more people are opting for home loans of 30 years or more.

However, these borrowers will end up paying more interest overall and they may end up having to raid their pension savings to keep paying or clear their mortgage, leaving them with less to live on in retirement.

'Gamble' with retirement prospects

Figures from the Bank of England show that more than one million new mortgages have been issued over the past three years with end dates beyond the state pension age, which is currently 66 for both men and women.

According to the Freedom of Information (FoI) data requested by former pensions minister Sir Steve Webb, a total of 91,394 or 42% of all new mortgages in the fourth quarter of 2023 had terms going beyond the borrower's state pension age. The trend is rising, as the proportion stood at 38% in the same period in 2022 and 31% in the fourth quarter of 2021.

"The huge number of mortgages which run past state pension age is shocking," said Sir Steve, who is now a partner at pensions consultancy LCP.

"The challenge of getting on the housing ladder is forcing large numbers of young home buyers to gamble with their retirement prospects by taking on ultra-long mortgages.

"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.

"Serious questions need to be asked of mortgage lenders as to whether this lending is really in the borrower's best interests."

Younger borrowers

Amid significant affordability pressures, younger borrowers in particular are increasingly taking out mortgages which run past pension age.

The FoI request showed that between 2021 and 2023, the number of people aged under 30 who did this soared by 139%.

There was a much larger number of people aged 30 to 39 borrowing beyond state pension age, but the rise was much less steep at 29%.

In contrast, the number of these long-term mortgages for all other age groups decreased between 2021 and 2023.

Although a mortgage taken out in someone's 30s, perhaps as a first time buyer, is highly unlikely to be their last mortgage, the risk to their retirement depends on what happens over the course of their working life and whether or not they are able to shorten the term, Sir Steve said.

He pointed out that, in the past, when people had mostly paid off their mortgage before pension age, they could spend their final years in work boosting their pension pot.

Some of those signing up for extended term mortgages will find their financial situation improves over time, allowing them to make overpayments or remortgage with a shorter term. Others may decide to downsize to a smaller property, or use equity release to pay off their mortgage. And some borrowers may be anticipating an inheritance that would help them clear their mortgage.

Proof of pension

"When reviewing new mortgage applications, lenders will act within the responsible lending rules set by the Financial Conduct Authority and carefully consider whether the borrower will be able to afford their mortgage in the future," said Karina Hutchins, principal for mortgage policy at UK Finance.

"This will include whether the requested term would take the borrower beyond their anticipated retirement age.

"Where this is the case, it is common practice for lenders to request proof of pension. Those closer to retirement, usually within 10 years, may need to satisfy their lender that they can afford the mortgage based on their retirement income."

Hutchins added that borrowers should speak to an independent mortgage adviser to discuss the best options available for their specific circumstances.