11 October 2022
New Freedom of Information (FOI) data from the FCA gathered by wealth manager, Quilter, reveals a concerning spike in the number of over 40s taking out mortgages with a term of 35 years or more at an age where the loan is likely to stretch into their retirement years.
In the first two months of this year alone, 478 mortgages with a term of 35 years or more were sold to people aged over 40, and projections show this figure is likely to grow to more than 3,039 sales of this kind throughout 2022. This would mark a 39% increase on 2021, during which 2,191 mortgages of this type were sold, and a staggering 433% increase on 2020 when just 570 were sold.
Aside from an anomalous peak in 2018 following the introduction of later life remortgage or home loan offerings from various lenders, the current sales figures are the highest seen in a decade.
The number of over 40s taking out mortgages with a term of 35 years or more may have increased for several reasons, though rising house prices are likely the main cause. House prices were pushed up significantly following the rush to buy during the pandemic and as house prices rose, so too did monthly repayments. As such, many over 40s may have extended their mortgage term to ensure the repayments are affordable on a month-by-month basis, particularly with the current cost of living crisis.
However, given those taking out a mortgage for 35 years or more from the age of 41 will be at least 76 when it is fully repaid, there is a real risk that their monthly repayments will have a detrimental effect on their quality of life in retirement. What’s more, with the current turbulence in the mortgage market and interest rates now predicted to hit close to 6%, those committing to such mortgages in the near future will be paying some of the highest interest rates seen for well over a decade.
Assuming someone age 41 had a mortgage of £250,000 with a 35-year term on an interest rate matching the current Bank of England base rate of 2.25%, they could expect to pay a £861 monthly repayment. While this figure may go up and down over the years depending on interest rate levels throughout their mortgage term, they will need to be confident they can afford to make their repayments until the age of 76 – eight years after they can expect to qualify for the state pension, and 19 years after they reach the normal minimum pension age.
If the interest rate rose to 6% as is currently predicted, they could expect to see their monthly repayments increase to £1426.
To put this into perspective, the full state pension currently sits at £185.15 a week (2022/23 tax year), or approximately £800 per month. While the state pension will increase over the 35-year mortgage period, so too will the everyday cost of living and it is therefore still highly unlikely to provide enough money to cover a mortgage repayment alongside everyday living costs, leaving people reliant on savings.
Karen Noye, mortgage expert at Quilter said:
“In recent years, we have seen a stark increase in the number of mortgages sold with terms of 35 years or higher. However, up until now this appeared to have been predominantly among younger first or second-time buyers. Since the pandemic, we have seen a steady increase in the number of over 40s taking out mortgages with longer terms and while this is not inherently wrong, it does have the potential to stretch people’s finances later in life.
“While the sales remain in the hundreds for now, as opposed to the thousands sold each month to people in younger age groups, the spike is concerning nonetheless. For those people considering entering into a mortgage that will see them well into retirement, it is vital they think ahead and are aware of the potential risks.
“Those people borrowing beyond their retirement age must consider whether paying a mortgage in retirement will have an impact on their standard of living. For many people, a high monthly mortgage repayment will not be conducive with their retirement savings, meaning their standard of living could be negatively impacted and they may not be able to comfortably afford their repayments.
“Additionally, while a mortgage term of 35 years or more can result in lower monthly repayments, you are likely to pay considerably more in interest over the course of your mortgage term.
“While there are several risks to consider, a longer mortgage term does not always spell bad news. Certain types of mortgage products allow you to make overpayments which could help to make repayments past retirement age more manageable. Overpaying can also help to reduce the amount of interest paid by decreasing the overall term length.
“If you are considering committing to a mortgage for 35 years or more, it is important to seek professional financial advice where possible. A financial planner can help you find the best mortgage product for your circumstances and consider your finances in the round to ensure you have the flexibility to overpay should you wish to. At the same time, they can help you plan for a comfortable retirement with the finances available to afford your mortgage repayments.”