More first-time buyers in danger of paying mortgages into retirement: What to know about longer terms
- First-time buyers often signing up to 30 or 35 year mortgages
- We reveal the downsides of opting for a longer mortgage term
First-time buyers are increasingly likely to be paying a mortgage in their retirement, as more take on loans lasting 30 or 35 years.
Those getting on the ladder for the first time, are opting for lengthy mortgage terms in order to make their monthly repayments more affordable.
While this saves them money from month-to-month, it means they will ultimately be paying off their mortgage for a longer period of time.
At present, the majority of first-time buyers are taking out mortgages with 30 year or 35-year terms.
The average length of first-time buyer mortgages has steadily been increasing over time. In 2005, the average term was 25 years. Today, it is 31 years, according to UK Finance data.
> What next for mortgage rates?
Stark reality: Many first-time buyers will be paying off their mortgages well into their sixties
That data also says that the average age of a first-time buyer is now 33. This means that on average, a first-time buyer purchasing a home today will be 64 years old when they finally pay the mortgage off.
While some will be fortunate enough to become mortgage-free earlier in life, others will likely be paying off their mortgage into their late sixties and early seventies, particularly those who opt for 35 year or 40-year mortgage terms.
Longer mortgage terms are not just a trend among first-time buyers, either. More homeowners are now choosing to lengthen their mortgage terms to reduce their monthly payments, according to Chris Sykes, associate director at mortgage broker, Capital Finance.
'Over the last few years, we have encountered more people opting to extend the length of their mortgage terms,' said Sykes.
'In the current higher rate environment, many individuals likely hope to extend their terms now and then refinance at a more competitive rate in the future.'
> When will interest rates fall?
Where do buyers take the longest mortgages?
It will also depend on where people live in the country, according to research by the online broker, Mojo Mortgages.
It found that first-time buyers in London will typically be paying off their mortgage later in life, with the average new buyer in the capital becoming mortgage free at roughly 67, which is above the current state pension age.
The West Midlands and South East followed closely behind, with first-time buyers in these regions expected to pay off their mortgages when they are between 64 and 65.
Mojo's research found that buyers in Wales will typically become mortgage free at a younger age than any other region in the UK, with the average person paying off their home loan at the age of 59.
How many pensioners currently still have a mortgage?
While this seems set to become a bigger problem in the future, there are plenty of retirees already grappling with a mortgage in the present day.
More than half a million retirees across the country have still not paid off their mortgages, according to research from life insurance company, SunLife.
It estimates that of all retirees, one in 14 – the equivalent of just over 500,000 older people – may still be burdened with paying monthly mortgage payments.
On average, these retired mortgage holders still owe £33,627, which, over a remaining five-year term at a rate of 5 per cent on a repayment mortgage, would mean a monthly payment of £635.
Mark Screeton, chief executive at SunLife said: 'According to our research, the average homeowner retiree has a home worth more than £320,000 but a household income of less than £30,000.
'This means that the vast majority are cash poor and property rich. And while most own their homes outright, some still have a mortgage.
'So, for those people, a chunk of that relatively modest income is still being spent on housing, rather than on making the most of life in retirement.'
The risks of lengthening a mortgage term
By lengthening the term of a mortgage, a borrower spreads their repayments over a longer period of time and therefore reduces the monthly costs.
However, whilst taking out a longer mortgage term will reduce the monthly costs, it will ultimately mean paying interest for a longer period of time, and therefore paying more in the long run.
As mortgage terms usually move up in brackets of five years, choosing a longer term can cost a substantial amount more.
For example, someone with a £200,000 mortgage paying 5 per cent interest over 20 years would face monthly repayments of £1,320, paying a total of £316,876 over the lifespan of the mortgage.
Conversely, someone with a £200,000 mortgage paying the same interest rate over a 40-year term would face monthly repayments of £965.
However, they would pay £463,136 over the lifespan of the mortgage: £146,260 more than on a 20 year term.
While their interest rate would likely change during this time if they remortgaged or fell on to their lender's standard variable rate, the principle remains the same.
John Fraser-Tucker, head of mortgages at Mojo Mortgages, is concerned about the long-term implications of longer mortgage terms.
He said: 'While longer mortgage terms can provide some short-term relief in the form of lower mortgage payments, they come at the cost of significantly higher overall interest charges over the life of the loan.
'Our research has found that with a 10 per cent deposit and the current average mortgage rate, the total cost of an average-priced house varies significantly on the loan term.
'For a 25-year loan term, the total cost would be £461,400, which includes the principal amount and interest charges.
'However, if you extend the loan term to 30 years, the same house will cost an additional £53,760, bringing the total cost to £515,160.
'And if you extend the loan term even further to 35 years, the total cost will increase by £110,640 compared to the 25-year term, amounting to £572,040.'
The other concern is that beyond paying more overall, mortgage borrowers may be forced to use their hard-earned pension funds to pay off their outstanding mortgage balance in retirement.
If they were relying on just the state pension, or a small private pot, this could cause financial strain.
'This could undermine someone's financial security in their golden years and increases the risk of poverty in old age,' added Fraser-Tucker.
'In less extreme cases, longer mortgage terms may deprive borrowers of an important period leading up to retirement when they could have been mortgage-free.
'This window of opportunity can be used to boost pension contributions or to enjoy experiences and activities that may not have been possible during their working years.'
Chris Sykes, associate director of mortgage broker Private Finance, says there is a growing trend of extended mortgage terms
How to manage a long mortgage term
For those who do opt for lengthy mortgage terms, it is possible to redress the balance by overpaying, according to Chris Sykes of Private Finance.
He adds: 'Making additional monthly payments can help pay down the mortgage faster and save on interest payments over the life of the mortgage.
'As an example to highlight the benefit of overpaying a mortgage, consider a £250,000 mortgage with a 30-year term and a 4.8 per cent interest rate.
'A recurring payment of £100 a month can help pay off the mortgage four years and three months sooner, saving £36,424 in interest over the life of the mortgage.
'Even a small monthly overpayment of £30 - just £1 a day - can pay off the mortgage one year and five months earlier, and save £12,486 in interest.'
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