Long-term mortgage loans, extending into retirement years, are increasingly being adopted by borrowers; yet, is this strategy risky?
Longer Mortgage Terms on the Rise Among British Borrowers
A significant shift has been observed in the UK mortgage market over the past five years, with an increasing number of borrowers opting for longer loan terms. According to recent data, there has been a 251% increase in the number of borrowers taking out mortgages with a term of 35 years or more since 2019. This trend is not limited to older generations, as there has also been a 56% increase in the number of borrowers aged 31-35 taking out these lengthy loans.
The rise in marathon mortgages has been particularly noticeable among younger borrowers. In 2019, 54,919 borrowers aged 31 to 35 took out a mortgage with a term of 35 years or more, and 8,639 borrowers aged above 36 did so. By 2024, this number had more than doubled for the younger age group, with 98,370 borrowers taking out such mortgages, while the older age group saw an annual increase of 42.5%, with 30,338 mortgages sold.
One of the main reasons for this trend is the financial flexibility offered by these mortgage types. They often omit traditional monthly repayments, easing the cash flow burden on seniors who may have limited or fixed incomes. Additionally, providers like Marathon Mortgage offer low mortgage rates alongside flexible terms that may allow borrowers to become mortgage-free sooner or manage payments according to their circumstances.
However, these longer mortgage terms present several risks that borrowers should be aware of. The accumulation of mortgage principal and interest over time can result in a higher overall cost, potentially reducing the residual equity or inheritance left to heirs. If the mortgage terms involve payments that become unaffordable due to rising interest rates or changing personal finances, retirees risk foreclosure and loss of their home. Furthermore, borrowing large amounts against home equity late in life may impair the value of the estate and how wealth is transferred to the next generation.
Zara Bray, a mortgage expert at Quilter, suggests that remortgaging to lower rates and shorter terms, overpaying some of the mortgage, and downsizing can help manage the financial risks associated with 35-year mortgages. Borrowers are advised to consult with financial advisors and understand specific mortgage terms from lenders like Marathon Mortgage to make informed decisions tailored to their retirement financial needs.
Despite the rising costs of retirement, with the average retirement costs being around £43,900 per year, the appeal of longer mortgage terms remains strong. Many borrowers could still have a mortgage when they are in their 70s due to the rise of marathon mortgages. House prices remain high despite falling mortgage rates, making it challenging for some borrowers to afford shorter mortgage terms.
In conclusion, while longer mortgage terms offer improved liquidity and payment flexibility, borrowers must weigh these benefits against the risks of increased debt burden, cost over time, and potential impact on estate value. It is essential for borrowers to carefully consider their financial situation and consult with financial advisors before making a decision.
- Many retirees, despite the prospect of increased debt burden and potential impact on estate value, find appeal in longer mortgage terms as they offer improved liquidity and payment flexibility, given the high costs of retirement and the average costs being around £43,900 per year.
- For those considering longer mortgage terms, such as 35-year mortgages, it's crucial to consider the potential risks, including the accumulation of mortgage principal and interest over time, which could reduce the residual equity or inheritance left to heirs, and the risk of foreclosure if mortgage terms become unaffordable due to changing personal finances or rising interest rates.
