Four times as many people have taken out mortgages they will still be paying off in their 70s as borrowers attempt to reduce repayments amid the interest rate hikes.
This is according to financial adviser, Quilter, which has discovered the number of borrowers taking out mortgage terms of 35 years or more as soared by 117% in four years.
Following a Freedom of Information (FOI) request to the FCA, Quilter found the number of people taking out mortgages with terms of 35 years or more hit a high of 88,059 in 2022 compared to just 40,471 in 2018.
What’s more, in 2022 there were over 12,000 people aged 41 plus who took out a 30 to 35-year term. In comparison, in 2018, just 3,035 people over the age of 41 took out a mortgage of this term.
It means four times as many people have taken out mortgages with terms they will be still paying off in their 70s, said Quilter.
According to Moneyfactscompare.co.uk, a two-year fixed rate mortgage is today (Monday 24 July) 6.81%. The Bank of England base rate, which is currently at 5%, is expected to increase again next month.
Quilter said with rates still clearly on the up, it would mean more people, regardless of age, will be forced into taking out longer mortgage terms.
Indeed, extending mortgage terms has also become an option for many more following the introduction of the Mortgage Charter, which was created to help those struggling to make repayments. One of the options for borrowers in difficulty is to extend their term, and then switch back to the original arrangement after six months.
Karen Noye, mortgage expert at Quilter: “For many people, to realise the dream of homeownership or to simply obtain an affordable mortgage they have had to increase the term of their mortgage.
“While this is not inherently wrong and can be a lifeline for people during this difficult time, it does have the potential to stretch people’s finances later in life particularly for those in their 40s.”
35-year mortgages – what are the pitfalls?
Spreading the repayments out over 35 years instead of the standard 25 years has the advantage that it will lower borrowers’ monthly repayments, making it easier to budget and manage household expenses.
However, borrowers thinking about this option should also understand the downsides, which include having to pay more interest over the course of the mortgage term.
Noye raised another point regarding retirement income. “For anyone considering entering into a mortgage that will see them well into retirement, it is vital they think ahead and are aware of the potential risks,” she said.
So, those taking out longer mortgage terms in their 40s should consider that a big chunk of their retirement wealth may end up being diverted into paying off a mortgage.
Noye added: “Many people under save for their retirement anyway without even taking into account the fact they will not be earning and need to pay for a mortgage as well as living costs.”
She used the example of someone, aged 41 with a mortgage of £250,000 and a 35-year term on an interest rate of 3%, which is roughly the average for the past 20 years.
They could expect to pay £962 monthly repayments or £11,544 over the year. While this figure may go up and down over the years depending on interest rate levels throughout their mortgage term, Noye said they would need to be confident they could afford to make these ‘’sizable repayments until the age of 76 using their retirement wealth.
According to the PLSA Retirement Living standards a comfortable retirement requires a single person to have an annual income (net of tax) of £26,700 per year on top of the state pension, which in 2023-24 is £10,600 per year.
So, if someone wants to achieve a comfortable retirement they will also need to find a further £11,544 to fund their mortgage.
Using overpayments to manage your mortgage
Noye explained that whilst there were several risks to consider, a longer mortgage term did not always spell bad news.
“Certain types of mortgage products allow you to make overpayments which could help to make repayments past retirement age more manageable,” she said.
“Overpaying can also help to reduce the amount of interest paid by decreasing the overall term length.
“Where possible, it is always worth getting mortgage advice to make sure that you are doing the best thing for your finances as the cheapest deal is not always the most valuable particularly over the long term.”
