There is growing interest in the press regarding ultra-long mortgages and the impact these could have on the retirement prospects of borrowers. Care should be taken if arranging such products and particular notice should be taken if the borrower(s) state their intended retirement age to be in their 70’s or beyond as they may simply be looking to avoid scrutiny and may in fact be intending to retire at the normal state pension age.
It is perhaps best practice therefore to explore affordability into retirement based on the assumption borrowers will look to retire from work at state retirement age.
Further, care should be taken if borrowers state they want an ultra-long mortgage term now for affordability purposes and aim to re-mortgage to a shorter term in the future. In reality this may be difficult to achieve and in any event, affordability into retirement should be assessed on the basis that this will not happen.
Some of the risks associated with ultra-long mortgages are:
Retirement Prospects at Risk – Homebuyers are increasingly taking on ultra-long mortgages that extend beyond their state pension age. Over a million such mortgages have been arranged in the last three years. This trend forces borrowers to “gamble” with their retirement prospects, as they’ll be paying off their loans well into their golden years.
Interest and Equity Impact – While longer mortgage terms reduce monthly repayments, they also mean borrowers pay much more interest over time. Additionally, equity builds up more slowly. Rising house prices and interest rates may have fuelled this trend, but it could leave borrowers vulnerable in later life.
Financial Vulnerability – The Bank of England has warned that rapid increases in longer-term home loans above 30 years could leave households more susceptible to debt shocks. Further, borrowers may end up using their pensions to pay off mortgages, jeopardizing their financial stability.
In summary, ultra-long mortgages offer short-term affordability however they pose significant long-term risks. Borrowers should be encouraged to carefully consider the impact on their retirement and financial well-being before committing to such extended loan terms.
