If limited pension funds are used to pay off a mortgage balance in retirement, people will be at greater risk of poverty in old age, says Steve Webb.
One million people have taken out home loans in the last three years beyond the current state pension age of 66, new data from the Bank of England reveals.
The “shocking” figure shows that the challenge of climbing the property ladder is forcing large numbers of buyers to gamble with their retirement prospects by taking on ultra-long mortgages, warns former Pensions Minister Steve Webb.
It says there is a real risk that these borrowers will have to tap into their pension savings to continue paying or pay off their mortgage in retirement, leaving them with less to live on in old age.
“Serious questions need to be asked of mortgage lenders about whether this loan is really in the best interests of the borrower,” says Webb, This is Money pensions columnist and partner at LCP.
The fastest-growing group of people taking out mortgages until retirement are those under 40, many of whom are first-time buyers, according to Webb, who obtained the official data through a freedom of information request.
The percentage of new mortgages in the fourth quarter of the last three years that were above the state pension age increased from 31 percent in 2021 to 38 percent in 2022 and 42 percent in 2023.
> Worried about paying off a long mortgage? Find out what to do next
Between 2021 and 2023, the number of people under 30 who did this shot up 139 percent. There was a much larger cohort who did this between ages 30 and 39, but the increase was much less pronounced: 29 percent.
According to Webb, this is likely a response to the unaffordability of home buying for many young people.
“Although it is very unlikely that a mortgage taken out when someone is in their 30s, perhaps as a first-time buyer, will be their last mortgage, retirement risk depends on what happens over the course of their working life and whether they are able or not to shorten the deadline,” he said.
Source: Mortgage data provided by the FCA to the Bank of England.
Webb says his main concerns are:
– Those who have mortgage debt at retirement can use their modest auto-enrollment pension funds to pay off the debt, leaving little for retirement itself and jeopardizing their later standard of living;
– In the past, when people paid off their mortgage before retirement age, they could spend their later years working to increase their pension fund. Even if mortgages only extend to retirement age (and not beyond), people are deprived of a pre-retirement period in which they could have paid off their mortgage and been able to increase their pension;
– Mortgage lenders may have little certainty about the future pension income of someone who is 30 today, so they cannot know whether borrowers will have enough income when they retire to repay a mortgage debt;
– An increasing number of people have left the labor market before reaching retirement age, putting additional pressure on them to maintain payments on an outstanding mortgage over the long term.
The number of people in each age group in the fourth quarter of 2023 who took out mortgages past retirement age and how that number has increased over the previous two years. Source: Mortgage data provided by the FCA to the Bank of England.
“The huge number of mortgages exceeding the state pension age is shocking,” Mr Webb said.
“We already know that millions of people are not saving enough for retirement, and if some of that limited retirement savings has to be used to pay off a mortgage balance in retirement, they will be at even greater risk of poverty in the future. old age”.
Webb submitted a freedom of information request following separate reporting from the Bank of England in March showing that around two in five new mortgages for 30-year-olds had passed retirement age by the fourth quarter of 2024.
This represents an increase of 23 per cent in 2021, it found after digging deeper into the topic and obtaining mortgage data provided by the Financial Conduct Authority to the Bank of England.
What to do if you’re worried about your mortgage retiring
If you don’t expect to be able to pay off your mortgage when you retire, you have several options.
Keep paying, if you can afford it
It is still possible to continue paying your mortgage after state pension age if your means allow, for example if you are still working.
Mortgage lenders used to insist that mortgage debt be paid off before the borrower turned 65, but more have now raised their maximum age restriction to 85.
This means that borrowers who can afford it can remortgage and continue repaying their loan as usual.
Overpay while you’re still working
Even if you can’t pay off your entire mortgage before you retire, overpaying while you’re still earning will reduce your debt and help you pay it off faster.
Most lenders allow borrowers to overpay a certain amount each year, often 10 percent of the remaining balance, without incurring fees.
Downsize and pay off the loan
If you’re open to the idea of moving house, purchasing a smaller or less expensive property outright could allow you to use the equity you’ve built up in your current home to pay off what you owe and become debt-free.
Consider an interest-only retirement mortgage
Over-55s can apply for a retirement or Rio interest-only mortgage, although the maximum borrowing is usually between 50 and 70 per cent of the value of their home.
You pay only the interest, making the mortgage more affordable for retired borrowers. The debt does not have to be paid until the last owner dies or moves into long-term care.
It can be paid earlier, without penalty, if the mortgage agreement has expired. Some lenders offer overpayment features.
Consider equity release
Equity release loans, also known as lifetime mortgages, can be used to pay off any outstanding mortgage debt, pay for home improvements or help loved ones get on the property ladder, for example.
The loan does not have to be repaid until the last borrower dies or moves into long-term care, but interest accrues over time and interest rates are higher than a traditional mortgage.
It will also affect the amount of inheritance you can leave.
> Read our guide on the ten steps you should consider before using equity release.
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