Long-term mortgage increase: Proliferation of mortgage loans stretching beyond retirement age, despite decreasing rates
Article Title: Extending Mortgage Terms Beyond State Pension Age: A Growing Trend in UK Retirement Planning
In the UK, questions are being raised about mortgage lending practices that may not be in the best interests of borrowers, particularly those who are taking out mortgages beyond the state pension age. This trend, which has become increasingly popular, is influencing retirement planning in significant ways.
By stretching mortgage terms past the traditional retirement age, homeowners are able to maintain affordability, given that fixed mortgage rates remain relatively high, around 4.4%. This means that retirees or near-retirees are taking on longer debts, potentially paying mortgages well into their 70s or beyond. This affects how they allocate funds for retirement living expenses.
The trend of retiring earlier than the state pension age (currently 66, rising to 67 by 2028) is also on the rise. This financial gap between retirement income and pension eligibility encourages strategies like taking pension withdrawals early or supplementing income using equity in property or extended mortgages.
The home is increasingly becoming an important retirement asset. Homeowners can access property value through equity release or by remaining in the property with a mortgage longer term. However, equity release can reduce inheritance value and potentially have less favorable financial terms.
Experts warn that having mortgage debt in retirement leaves people at risk of poverty in old age. The surge in young people taking out long mortgage terms is a response to soaring interest rates. In the fourth quarter of 2021, 88,933 new mortgages were taken out where the term ran past the homeowner's state pension age, representing 31% of all mortgages.
By the last quarter of 2023, the figure had dropped to 91,394, but the proportion had risen to 42% of all new mortgages. This shows a growing trend of homeowners opting for longer mortgage terms to make monthly repayments more manageable against high interest rates.
However, there are still risks associated with having mortgage debt in retirement. Depriving people of a period pre-retirement when they might have paid off their mortgage and been able to boost their pension is one such risk. Another risk is that if some of their limited retirement savings have to be used to clear a mortgage balance at retirement, people will be at greater risk of poverty in old age.
Despite these risks, the cost of borrowing has been falling in recent months, with interest rates cut to 4.75% in November. This could make extending mortgage terms more attractive to homeowners.
It is important for homeowners to review their mortgage term every time a new deal is taken out, as this can help make the mortgage more affordable by decreasing the term if income has increased or outgoings have fallen. Overpaying a mortgage can also save thousands in interest and pay off the mortgage earlier than planned.
Most lenders allow customers on fixed mortgage rates to make overpayments of up to 10% of the outstanding balance in a year. Some homeowners may work into their retirement and past state pension age, meaning they will still have income to service their mortgage. People with a mortgage balance at retirement may choose to use their pension pots to clear the mortgage balance.
A Freedom of Information request suggests the number of people who will still have a mortgage in retirement is set to remain high. This trend reflects and drives more complex retirement planning, where property is both a home and a financial asset to fund later life, but also introduces risks of running out of money or reduced inheritance.
In conclusion, extending mortgage terms beyond state pension age extends homeowners' debt burdens into retirement, requiring them to balance mortgage repayments with pension income, early pension withdrawals, and potential equity release. This trend reflects and drives more complex retirement planning, where property is both a home and a financial asset to fund later life, but also introduces risks of running out of money or reduced inheritance.
- Concerns regarding mortgage lending practices prompt questions about their impact on retirees, as more people are taking out mortgages beyond the state pension age, influencing personal-finance decisions during retirement planning.
- As interest rates remain relatively high, stretching mortgage terms past the traditional retirement age allows homeowners to maintain affordability, potentially paying mortgages into their 70s or beyond, altering how they allocate funds for retirement living expenses.
- In an effort to address the financial gap between retirement income and pension eligibility, strategies such as taking pension withdrawals early, supplementing income using property equity, or applying for extended mortgages are becoming more popular.
