Warning for 1million young homeowners who will be paying off ‘ultra- long’ mortgages in retirement
MORE than one million homeowners are being warned that they could be paying off “ultra-long” mortgages into their retirement.
Budding young buyers are choosing longer mortgage terms as a way of making their monthly repayments more manageable against a backdrop of high interest rates.
But stretched mortgage terms can affect some borrowers’ plans for retirement.
In the last three years, over one million people took out new mortgages which would run past the state pension age, according to a Freedom of Information (FOI) request to the Bank of England (BoE) sent by financial service company LCP.
The state pension age is currently 66 years old for both men and women.
It revealed that the fastest growing group of people taking out mortgages lasting into retirement is those aged under 40, many of whom are first-time buyers.
Steve Webb, former pensions minister and now partner at LCP, said there is a risk that these groups will not be able to pay off their mortgage into retirement and will raid their pension.
This would leave them with less to live on in old age.
Between October 1 and December 31, 2021, 88,933 new mortgages were taken out with terms which ran beyond the state pension age.
In the same period in 2022, this figure stood at 113,916 and last year it was 91,394.
Steve Webb said: “The huge number of mortgages which run past state pension age is shocking.
“The challenge of getting on the housing ladder is forcing large numbers of young home buyers to gamble with their retirement prospects by taking on ultra-long mortgages.
“We already know that millions of people are not saving enough for their retirement and if some of that limited retirement saving has to be used to clear a mortgage balance at retirement they will be at even greater risk of poverty in old age.
“Serious questions need to be asked of mortgage lenders as to whether this lending is really in the borrower’s best interests.”
It follows a turbulent period for mortgages after the BoE hiked interest rates as a means of tackling soaring inflation.
Inflation is a measure of how much the prices of everyday goods like food and clothes, and services like train tickets and haircuts, are now compared to a year earlier.
How does the state pension work?
AT the moment the current state pension is paid to both men and women from age 66 - but it's due to rise to 67 by 2028 and 68 by 2046.
The state pension is a recurring payment from the government most Brits start getting when they reach State Pension age.
But not everyone gets the same amount, and you are awarded depending on your National Insurance record.
For most pensioners, it forms only part of their retirement income, as they could have other pots from a workplace pension, earning and savings.
The new state pension is based on people’s National Insurance records.
Workers must have 35 qualifying years of National Insurance to get the maximum amount of the new state pension.
You earn National Insurance qualifying years through work, or by getting credits, for instance when you are looking after children and claiming child benefit.
If you have gaps, you can top up your record by paying in voluntary National Insurance contributions.
To get the old, full basic state pension, you will need 30 years of contributions or credits.
You will need at least 10 years on your NI record to get any state pension.
The base rate currently sits at a 16-year high of 5.25%.
High street banks and lenders use the base rate to set the interest rates it offers customers on mortgages, loans and savings.
The bank rate previously increased from historic lows of 0.1% in December 2021, pushing up mortgage rates for millions of households.
This led to buyers choosing longer mortgage terms as a way of coping with interest rate hikes.
But there are other ways for borrowers to lower their mortgage payments, as we explain below.
How can I lower my mortgage payments?
Make overpayments
Most lenders allow customers on fixed rates to make overpayments of up to 10% of the outstanding mortgage balance in a year.
This is without being hit with an early repayment charge.
Overpaying by even a small amount could reduce the mortgage term and interest.
So even when there’s a longer term, borrowers have the flexibility to repay the mortgage more quickly.
Megan said: “Certain types of mortgage products allow you to make overpayments which could help to make repayments past retirement age more manageable or mean you are able to repay your mortgage before you retire.
“Making overpayments even if a small amount, over a number of years may allow you to reduce the term in the future without it having such a big impact on the monthly payments.
“Overpaying can also help to reduce the amount of interest paid by decreasing the overall term length.”
Overpaying will also slash the interest bill over the longer run and could also cut the loan to value more quickly – opening up access to better deals.
Review your mortgage term
It is possible to review your mortgage term every time you take a new deal.
So even if you have taken the maximum term initially, it’s always worth taking another look.
Karen said: “It might be affordable to reduce the term in the future, even just a year or two can make a difference.”
Get mortgage advice
“Shopping around for the best rates will help not only initially but also each time a deal comes to an end,” said David Hollingworth, an associate director of L&C Mortgages.
“Taking advice on the best value deal for you could help to limit the need to lengthen the term as much as substantially but will also ensure that you keep it under review in the years to come.”
A mortgage broker who can compare a much larger range of deals for you.
Some will charge an extra fee but there are plenty who give advice for free and get paid only on commission from the lender.
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