More first-time buyers risk having to pay mortgages in retirement: what you need to know about longer terms

First-time homebuyers are increasingly likely to pay off a mortgage in retirement as more people take out loans with a 30- or 35-year term.

First-time borrowers are opting for longer mortgage terms to make their monthly payments more affordable.

While this allows them to save money month to month, it means they will ultimately be paying their mortgage over a longer period of time.

Today, most first-time home buyers are applying for mortgages with 30- or 35-year terms.

The average length of mortgages for first-time buyers has been steadily increasing over time. In 2005, the average term was 25 years. Today, it is 31 years, according to data from UK Finance.

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This data also indicates that the average age of a first-time homebuyer is now 33. This means that, on average, a first-time homebuyer purchasing a home today will be 64 years old when they finally pay off their mortgage.

While some will be fortunate enough to become mortgage-free at a younger age, others will likely be paying off their mortgage well into their late sixties and early seventies, particularly those who opt for 35- or 40-year mortgage terms.

Longer mortgage terms are not just a trend among first-time buyers. According to Chris Sykes, associate director at mortgage broker Capital Finance, more homeowners are now choosing to lengthen their mortgage terms to reduce their monthly payments.

“In recent years, we’ve seen more people opt to extend the length of their mortgages,” Sykes said.

‘In the current higher interest rate environment, many people are probably hoping to extend their terms now and then refinance at a more competitive rate in the future.’

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Where do buyers take out the longest mortgages?

It will also depend on where people live in the country, according to research by online broker Mojo Mortgages.

First-time homebuyers in London were found to typically pay off their mortgage later in life, with the average new buyer in the capital becoming mortgage-free at around 67, which is above the current state pension age.

The West Midlands and South East followed closely behind, with first-time buyers in these regions expected to pay off their mortgages by the time they are aged 64-65.

Mojo research found that buyers in Wales typically become mortgage-free at a younger age than in any other region of the UK, with the average person paying off their home loan by the age of 59.

How many retirees still have a mortgage today?

While this looks set to become a bigger issue in the future, there are many retirees who already have to deal with a mortgage today.

More than half a million retirees nationwide have yet to pay off their mortgages, according to a study by life insurance company SunLife.

It is estimated that one in 14 of all retirees (the equivalent of just over 500,000 seniors) may still have to face monthly mortgage payments.

On average, these retired mortgage holders still owe £33,627, which, over a remaining five-year term at a 5 per cent rate on an amortising mortgage, would mean a monthly payment of £635.

Mark Screeton, chief executive of SunLife, said: ‘According to our research, the average retired homeowner has a home worth more than £320,000 but a household income of less than £30,000.

‘This means that the vast majority are cash poor and property rich. And although most own their homes, some still have a mortgage.

‘So for those people, a portion of that relatively modest income is still spent on housing, rather than making the most of life in retirement.’

The risks of extending the term of a mortgage

By lengthening the term of a mortgage, the borrower spreads his or her payments over a longer period of time and therefore reduces monthly costs.

However, while taking out a long-term loan will reduce your monthly costs, it will ultimately mean paying interest over a longer period of time and therefore paying more in the long run.

Since mortgage terms typically increase in five-year increments, choosing a longer term can cost considerably more.

For example, someone with a £200,000 mortgage paying 5 per cent interest for 20 years would face monthly repayments of £1,320, paying a total of £316,876 over the life of the mortgage.

By contrast, someone with a £200,000 mortgage paying the same interest rate over 40 years would face monthly payments of £965.

However, they would pay £463,136 over the life of the mortgage – £146,260 more than over a 20-year term.

While your interest rate would likely change during this time if you refinanced your mortgage or adopted your lender’s standard variable rate, the principle remains the same.

John Fraser-Tucker, mortgage director at Mojo Mortgages, is concerned about the long-term implications of longer mortgage terms.

He said: ‘While longer mortgage terms may provide some short-term relief in the form of lower mortgage payments, they come at the cost of significantly higher overall interest charges over the life of the loan.

‘Our research has found that with a 10 per cent deposit and the current average mortgage rate, the total cost of an average-priced home varies significantly depending on the term of the loan.

‘For a 25-year loan term, the total cost would be £461,400, which includes the principal and interest.

‘However, if the loan term is extended to 30 years, the same house will cost £53,760 more, bringing the total cost to £515,160.

“And if we extend the loan term further to 35 years, the total cost will increase by £110,640 compared to the 25-year term, which amounts to £572,040.”

The other concern is that, in addition to paying more overall, mortgage borrowers may be forced to use their hard-earned pension funds to pay off their outstanding mortgage balance in retirement.

If they were to rely solely on the state pension or a small private fund, this could cause financial difficulties.

“This could undermine someone’s financial security in their golden years and increases the risk of poverty in old age,” Fraser-Tucker added.

‘In less extreme cases, longer mortgage terms can deprive borrowers of an important pre-retirement period when they could have been mortgage-free.

‘This window of opportunity can be used to increase pension contributions or to enjoy experiences and activities that might not have been possible during your working years.’

Chris Sykes, associate director at mortgage brokers Private Finance, says there is a growing trend towards extending mortgage terms.

How to manage a long mortgage term

Those who opt for longer mortgage terms may be able to offset the balance by paying extra, according to Chris Sykes of Private Finance.

She adds: ‘Making extra monthly payments can help you pay off your mortgage faster and save on interest payments over the life of your mortgage.

‘As an example to highlight the benefit of overpaying on a mortgage, consider a £250,000 mortgage with a 30-year term and an interest rate of 4.8 per cent.

‘A recurring payment of £100 a month can help pay off your mortgage four years and three months earlier, saving £36,424 in interest over the life of your mortgage.

‘Even a small monthly overpayment of £30 (just £1 a day) can pay off your mortgage a year and five months sooner and save you £12,486 in interest.’