One in four mortgages will end when the borrowers are in retirement as more people extend the term of their deals.
This is according to data from the Bank of England which emerged following a Freedom of Information (FOI) request by former pensions minister Sir Steve Webb.
In the last three months of 2021, it was revealed 31% of new mortgages taken out had an end date beyond state pension age.
But in the same period in 2023 the proportion increased to 42% of new mortgages.
Many of these mortgages were take out by borrowers aged under 30 meaning they were being forced to extend the term beyond the standard 25 years in a bid to make repayments more affordable.
In March Uswitch published research on the rise in ‘mammoth mortgages’ which showed both homebuyers and remortgagers were opting to extend terms for 35 to 40 years as they sought ways to manage repayments in the cost-of-living crisis.
The news has come as no surprise to mortgage brokers, who have seen the rise in extended term mortgages first hand from clients grappling with rising interest rates.
Katy Eatenton, mortgage & protection specialist at Lifetime Wealth Management, who was speaking to the Newspage Agency, said she was surprised the figure was as low as 42%.
“The majority of borrowers remortgaging are extending the term as long as possible to soften the blow of the huge jump in interest rates,” she explained.
“Younger borrowers, meanwhile, are taking 35- to 40-year terms because they want to maximise their disposable income in the early years to allow them to build up savings or investments and then reduce the term when they remortgage, are earning more, or their circumstances change.
“This data highlights the bind many borrowers are in at present.”
Risks of extended mortgage terms
Whilst, for many borrowers, paying mortgages into retirement is the only way to manage mortgage repayments, there are some things to consider when opting for this route.
Pete Mugleston, MD and mortgage expert at www.onlinemortgageadvisor.co.uk, said: “This strategy poses risks, and could jeopardise their ability to save adequately for retirement, leaving them vulnerable to financial challenges later in life.
“As such, it emphasises the need for comprehensive financial education and support to ensure that individuals can navigate the complexities of homeownership without compromising their future financial well-being.”
The other pitfall of extending mortgage terms is that over the length of the mortgage borrowers will pay more interest and will build equity more slowly.
However, with hopes of an interest rate cut later this year, the affordability pressures forcing borrowers to extend terms may ease off.
Michelle Lawson, director at Lawson Financial, also speaking via the Newspage Agency, said: “Given the rising interest rate environment of recent years and the constraints on affordability, borrowers have had little option but to take longer terms. People are borrowing into retirement out of necessity, not choice.
“That said, that doesn’t mean the term will stay like that forever. If interest rates come down, terms may be reduced. Affordability and monthly budgets are driving the payments and mortgage term for most.”
