The figures don’t look good. Previously three years a couple of million individuals have taken out new mortgages that can run previous their state pension age.
On the finish of 2023, this accounted for greater than 4 in 10 new mortgages, with the very best enhance amongst individuals of their thirties, largely taking their first step on the housing ladder — unsurprising, when turning into a first-time purchaser is the costliest it has been for generations. However even the Monetary Conduct Authority (FCA) admits that extending mortgage phrases is a symptom of, slightly than an answer to, in the present day’s affordability problem.
Standard monetary planning advises you to repay your mortgage lengthy earlier than state pension age, at present at 66 (although that is set to rise). That is achievable on what had been previously thought-about “normal” 25-year phrases. However the proliferation of 40-year phrases may pressure householders to raid their pension pots to make mortgage funds, leaving them with much less to dwell on in outdated age.
However is that this all the time a mistake?
There’s a long-running various technique of by no means paying off your mortgage and as a substitute investing the cash that will have gone into capital funds. Those that are long-term buyers — and may tolerate inventory market fluctuations — might be able to earn extra from their portfolios than they’d pay in mortgage curiosity.
For youthful debtors, it would even be wise to take out a 40-year time period to maximise their disposable revenue within the early years, permitting them to construct financial savings or investments, after which cut back the time period once they remortgage and are incomes extra, or their circumstances change.
The ability of compounding on investments over a number of many years signifies that if the cash saved beats the mortgage curiosity paid, you possibly can find yourself richer regardless of the longer-term debt. Sometimes, the very best likelihood of attaining that is by focusing in your pension, the place your investments profit from an uplift of tax reduction — and sometimes an employer contribution in addition.
Investing also can make sense in the event you’re nearer to retirement age and are comparatively effectively off. James Baxter, founding father of wealth administration agency Tideway Wealth, was turning 62 when he fastened his mortgage for 5 years at 3.89 per cent. He can cowl the curiosity price of his £750,000 mortgage with £400,000 in Isa investments held in fastened revenue.
One other good thing about longer phrases is the potential for inflation to erode the debt. The common home worth in the present day is £291,000; if a 75-year-old had purchased one at this worth 40 years in the past, it may need price £26,000. Had she taken a £19,500 interest-only mortgage that she’d run into retirement, she would now be paying £73 per 30 days curiosity at 4.5 per cent.
In the present day, a 4.5 per cent mortgage price could appear excessive, however with inflation at 3 per cent it’s solely costing you 1.5 per cent in actual phrases. Baxter says: “If inflation goes to be a bit greater for the subsequent few many years in comparison with the final couple, having some debt leveraged towards good investments is not going to be a nasty factor.”
For most individuals, it’s just too psychologically troublesome to take the chance of investments not figuring out.
Plus they might aspire to the pleasure of repaying a mortgage of their fifties, when monetary life could also be wanting shakier because of altering work or well being circumstances.
However there may be one different profit to having a mortgage previous retirement. Noting that inheritance tax (IHT) revenues reached document ranges in 2023, some wealthier individuals are utilizing mortgages in retirement to cut back their legal responsibility.
We’ve reached the purpose the place, regardless of essential residence reduction, it’s inconceivable to personal some modest terraced homes in London and the south- east with out incurring an IHT legal responsibility. Sure, married {couples} can move on £1mn freed from IHT, together with essential residence values. However the residence nil fee band tapers for estates above £2mn.
With a mortgage (or equity-release mortgage) to unencumber money for lifetime presents to household and associates you possibly can dwell out your time in the identical house with out passing on a giant IHT invoice to beneficiaries.
At present, older debtors might wrestle to get good phrases on a remortgage, as in the course of the previous few years of the mortgage, it may be more durable to get rate of interest deal. Halifax, the UK’s largest mortgage lender, final summer time raised its most age utilizing earned revenue to 75 earlier than reining it back to 70 in March.
Nevertheless, some advisers see indicators of later-life mortgage charges getting extra aggressive, citing examples of lending as much as age 80 at excessive road charges.
Final week Emily Shepperd, chief working officer on the FCA, mentioned: “Lending into retirement is transferring from a distinct segment to a norm.” Based on the regulator, the proportion of mortgage clients over 67 is at present lower than 2 per cent of all loans. However it predicts that by 2040 this can rise to five per cent, and by 2050 will likely be virtually 10 per cent.
Although 50-year multigenerational mortgages had been within the Conservative celebration’s 2019 common election manifesto and haven’t but made it into the mainstream, brokers say the market is prone to adapt to satisfy shopper demand, launching merchandise which is able to allow later-life borrowing past what we at present see.
Nonetheless, lenders can withdraw from the market and lending guidelines can change. A few of those that took out a mortgage earlier than 2014 discovered it more durable to modify to a greater deal due to new stricter affordability guidelines launched by the FCA. So there aren’t any ensures and the dangers of a protracted mortgage time period could also be unknown.
Moira O’Neill is a contract cash and funding author. X: @MoiraONeill, Instagram @MoiraOnMoney, e mail: moira.o’neill@ft.com
