Steve Webb: Should we be concerned about surge in mortgages running into retirement?

It is not often the Financial Conduct Authority comes up with a snappy soundbite.

However, responding to the growth in mortgages with terms running beyond pension age, earlier this year the regulator said such lending was moving “from a niche to norm”.

I think this admirably sums things up. But should we be concerned?

Using the Freedom of Information Act, I asked the Bank of England to give me information about new mortgages (for both first-time buyers and remortgages) whose term ran past the state pension age. In the fourth quarter (Q4) of 2021, just under one in three (31%) of mortgages ran past pension age.

Regulators and those interested in pensions policy need to take a close look at what is going on in the mortgage market

By Q4 2022, the proportion had risen to 38%, and at the end of last year it was 42% — certainly no longer a “niche”.

Some of this is clearly first-time buyers doing their best to get started with a mortgage and willing to take on a super-long term to do so.

Out of just over 91,000 new mortgages taken out in Q4 2021 and which ran past pension age, just over a third were for people in their thirties or younger. But a surprising proportion went to older borrowers, with more than a quarter going to those aged 50-plus.

Surface view

At first sight, we might be fairly relaxed about the rise of the long mortgage.

If it enables a young person to move from private renting into homeownership, it may look very attractive. And, as their career progresses, there is the potential to shorten the mortgage term.

If the mortgage runs up to retirement, those mortgage-free later-life working years to top up the pension may never happen

Likewise, we may be relatively unconcerned about people in their sixties taking out a mortgage that runs a few years past pension age.

Mortgage lenders will have a good sense of the income in retirement of this group. This may be enough to be confident the debt can be safely serviced to the end of the term.

We may also hope that some of this very long-term lending is a temporary reaction to higher interest rates and that the need for super-long mortgages will diminish as rates fall.

Deeper look

However, I still think we should be concerned.

First, many millions of people are heading towards retirement with inadequate pension savings. Often, state and private pensions combined may be inadequate for much more than a modest retirement, and certainly will not service a mortgage debt as well.

One particular concern would be if people were to reach pension age with a modest defined contribution pension pot and an outstanding mortgage balance; they might use one to pay off the other, leaving them with a very low income in retirement.

We may hope that some of this very long-term lending is a temporary reaction to higher interest rates

Even if mortgages run only to pension age, this is a change from a historical pattern where many people had cleared their mortgage a decade before retirement and could use the remaining years in work to boost their pension.

If the mortgage runs up to retirement, those mortgage-free later-life working years to top up the pension may never happen.

And all of this assumes that individuals are working all the way up to pension age. In reality, millions of UK adults in their fifties and early sixties are now out of paid work because of long-term sickness.

Those who have taken on a mortgage with a term that runs into retirement, but whose stream of earnings dries up a decade earlier, could find themselves in serious difficulty.

Wiping out progress

We do not yet know if falling interest rates will lead to a significant drop in the number of new mortgages running into retirement, but it is hard not to envisage this being a significant factor for years.

At first sight, we might be fairly relaxed about the rise of the long mortgage

Regulators and those interested in pensions policy need to take a close look at what is going on in the mortgage market.

They must make sure the progress that has been made in getting 10 million more people saving into a workplace pension is not wiped out by changes in borrowing and lending patterns.

Steve Webb is a partner at pension consultants LCP and was pensions minister 2010–15

This article featured in the November 2024 edition of Money Marketing. 

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