Mortgages and pensions

ended 21. April 2022

A journalist at the Daily Express is writing a piece on homeowners increasingly looking like they'll be paying off their mortgages with their pensions as they take out longer mortgages with lower monthly payments due to the cost of living crisis and spiralling house prices. Traditionally, a 25-year term mortgage was paid off well before retirement but people these days are taking out much longer terms. Why is this? Is this going to become the norm for mortgages? Are the last years of more people's mortgages going to have to be paid off with their pensions? What additional pressures could this apply to their finances?



 

7 responses from the Newspage community

"Many people became addicted to cheap credit when the base rate was at an all-time low, and this has lulled them into a false sense of security thinking it wouldn't change. Consequently, we have seen people taking out huge mortgages, extending beyond their state retirement ages and leveraging up with unsecured finance such as large credit card balances and car finance to keep up with the Joneses. "Now the cost of living has started to increase along with interest rates and mortgage payments people are in for a shock. The knock-on effect of this is people may need to extend beyond working age to clear off all their debts, with many rushing to consolidate unsecured lending into their mortgages to free up disposable income and therefore stretch their mortgage term for as long as possible. Not to mention there are a number of interest-only self-cert mortgages coming up for redemption and many won't have planned for this. "Humans tend to only think of the here and now and are terrible at forward-thinking despite what people believe. Unfortunately for many, the chickens are about to come home to roost."
Star Quote
"Gone are the days of the 25 year mortgage term. A mortgage term can be anywhere up to 40 years, and they often need to be in order to be affordable considering the current climate where house prices are rising much faster than wages can keep up with. Most mortgage lenders will only allow the term to go until either state retirement age, or selected retirement age, unless evidence of pension provisions can be provided. For most this simply means working to an older age than they may have hoped in order to buy a house. Those that have strong pension provisions could look for a term into retirement, where mortgage payments would continue from pension income."
Star Quote
"25-year mortgages came about because 25 years was the term of most endowment plans. It had very little to do with the mortgage or any kind of financial planning by the client in regards to their needs or wants. Remember, this was back in the days when you had to basically beg your bank manager to allow you to borrow their money. You'd also most likely be having an interest-only mortgage, so the term of the mortgage had little impact on your monthly outgoings. "Thankfully, time has moved on and we are now at a place where the correct mortgage term is selected by the client and is based on their lifestyle and choices, hopefully with guidance from a professional mortgage broker. The vast majority of mortgages are now taken on a repayment basis, so the term selected now has a very real and direct impact on the monthly commitment you are taking on. It is often better to take a longer term that is easily affordable and then make voluntary overpayments, than struggle with a shorter term that leaves you with very little money to actually enjoy life. The key is to get the balance right."
"When looking at mortgage terms, an adviser takes into account the interest rate being recommended, the borrower's budget and lender's affordability assessment. We are seeing that mortgage terms are extending for some to bring the monthly payment to an affordable cost. The 25-year term that was once popular was recommended as that was the term of most endowment policies that were used to support interest-only mortgages, back in the day. Mortgage lending has evolved and most mortgages are capital and interest and do not rely on a separate repayment vehicle. This means that the term can be chosen to match requirements. We are seeing that in some areas of the country, where property prices are higher compared to income, borrowers are needing to extend their mortgage term up to 40 years to bring the monthly cost down. However, this term is reviewed with their mortgage adviser and often the term is changed when the next mortgage is arranged, or if a change of circumstances permit. It is not convention for lenders to agree a mortgage that exceeds a person's retirement age and most lenders expect a non-later-life-loan to be repaid by the borrower's retirement age or age 70, though there are exceptions to this rule."
"The undeniable truth is that house prices are too expensive, and the only way buyers can afford to purchase is by extending the mortgage term to make the monthly payment affordable. Ever-increasing numbers of people end up paying the mortgage off during their retirement, which is ok if you have sufficient pension income to satisfy the lender. Many don't. What we really need are lower house prices, not stamp duty holidays and help to buy. All they do is push prices up further, as we've just seen."
This is exactly where Lifetime Mortgages can be a useful financial planning tool. We are finding more and more people have a mortgage well into their retirement with the repayment vehicle being Pension/Investment or downsizing. Borrowers in later life then find their investment has not performed well enough to cover the mortgage, they have used their pension, or they do not want to move from their beloved home A lifetime Mortgage can provide the solution to this. With no affordability assessments the client can repay their mortgage via equity release and continue to own and live in their home for the rest of their life.
"The British obsession of paying off a mortgage by retirement is set to become a thing of the past. Why should the biggest asset that most of us will ever own not be used to ensure retired people have a more comfortable retirement? The cost of living crisis will exacerbate the move towards lifetime mortgages. Over-65s are starting to realise that rather than go without, struggle with bills and not be able to treat themselves and family members, they can use the value in their property to boost their current income."