Why longer mortgage durations may cause future problems
Ask anyone who took their first mortgage in years gone how it felt, and they’ll likely tell you that the 25-year loan they agreed seemed like a lifelong commitment, with an end date stretching far off into the distance, in a world they could barely imagine. That sense of a distant future can only be multiplied now that mortgages of 40 years have become customary for many joining the property ladder.
With rising house prices and affordability challenges, lenders now offer longer terms, which are particularly attractive to those wanting to manage monthly repayments by spreading costs over a longer period. That, you might consider, is eminently sensible when it comes to ensuring that a borrower isn’t over-burdened. But is the industry storing up problems for the future for those people daring enough, you could say desperate enough, to take a longer-term commitment to ensure a home of their own?
Alison Dearman (pictured left) certainly thinks so. Having spent over 35 years as a mortgage adviser for a major building society, and now working as a whole of market broker, she’s seen how things have changed and she’s concerned. “People are borrowing so much later in life and for so much longer, aren't they?” Dearman said. “So now it's not a 25-year mortgage anymore, it's a 40-year mortgage. You haven't got to finish it by state retirement age - we'll assume that you can work up to the age of 75. Whether that's feasible or not, I don't know, and then you can take your mortgage beyond that into your retirement as well.”
Those borrowers counting on an inheritance to pay off their longer-term mortgage may come unstuck, Dearman believes. “The number of people I speak to who have said, “Oh, I don't need to worry about paying my mortgage off because I'm going to get an inheritance’,” she shared. “If you think how many people actually end up inheriting from their parents, how many parents now end up going into care homes, with the majority of their assets taken in care home fees, I think, down the line, it's going to become an issue.”
Broker Ben Groves (pictured second from left), founder and managing director of Yomo Finance, has reservations about longer-term mortgages too. “It very much is a concern,” Groves agreed. “We are doing more and more longer-term mortgages to suit clients’ affordability, lots of 40-year terms, to help right now. Clients do plan on reducing their term when rates hopefully fall over their current product, but what if they don’t? All that additional interest and prolonged, reduced disposable income can really have an impact on generational wealth.”
Specialist mortgage adviser and director of Chess Mortgages, Bob Singh (pictured centre) identifies what he considers as a gradual loosening of criteria around longer terms. “The lines are definitely blurred when we look at responsible lending,” Singh noted. “The lenders have gradually moved the end date to age 70 in most cases, presumably on the basis that in the years to come, our government will be further broke and will extend retirement age to 70 and beyond to delay paying state pension. Some lenders, now, will lend to age 75 with no proof of pension income. This helps affordability for the older borrowers but it does leave a question mark as to how they will service the mortgage should they have to retire many years earlier.” He continued: "We know that inflation over a 25-year period will erode the true value of the debt and with rises in income over that period affordability should not be an issue . Regular lump sum overpayments would be a good strategy for those who wish to retire before their mortgage end date.”
Later life interest only mortgages could become mainstream as the population ages, in Singh’s view. “Regulation would have to be altered to enable lenders to consider an automatic switch option, particularly on interest only mortgages, subject to affordability, to negate the need to take out an equity release mortgage,” he said. “Lenders would be well advised to send out annual reminders after the borrowers’ state retirement age to establish a dialogue and offer assistance where needed.”
The importance of properly planning for long-term mortgages
Katrina Horstead (pictured second from right), co-founder and director of the brokerage Versed, emphasised the importance of borrowers seeking good advice. “While longer mortgage terms can offer improved affordability, particularly useful for first-time buyers and those struggling with higher interest rates, they do come with longer-term considerations,” Horstead said. “Paying a mortgage into retirement may place financial pressure on borrowers at a time when income typically reduces and living costs can rise, and that needs to be carefully factored into planning. For many, a longer term at the outset is simply a practical stepping stone, not a permanent structure. In our view, with the right advice, education, and engagement over time, clients can still manage longer-term borrowing responsibly, but it’s crucial that the risks and opportunities are clearly explained from the outset.”
One needs to be pragmatic when looking at arranging longer terms on mortgages, suggests broker Richard Campo (pictured right), head of growth at Heron Financial. “We are coming out of a cost-of -living crisis and now feeling the effects of a round of hyperinflation, the likes of which we haven’t seen since the 1970s,” Campo said, “hence why many borrowers are opting for longer terms to maintain their lifestyle, or even just to get by. I completely understand why some people want to push the term out to 35 to 40 years - why buy a house and then have to live on beans on toast and no holidays to afford it? Also, as inflation decreases debt in real terms, I would not be surprised if these mortgages actually get paid off in 25 years or less, as over time wages catch up, debt remains static - or decreasing - and you can attack the loan in the later years and get back to where you may have been if you had a shorter term at the start, but just didn’t have to suffer for it in the early years.”
Campo actively manages this aspect with his clients by establishing a budget and arranging the shortest term possible when it comes to refinance, not just carrying on with the long term without question. “If you are lucky enough to have parents that own a home and have assets, the harsh truth is that it will find its way to you in time, and it is also a factor why some people opt for longer terms,” he said. “If they are in that situation, the inheritance will clear the loan in any event. While you can’t bank on that, it is a reality that many clients factor into their thinking.”
