Mortgage holders trying to decrease their monthly payments might risk added financial pain further down the line, officials at the Bank of England have warned.
As interest rates remain at a 16 year high, tens of thousands of homeowners are having to opt for mortgage terms that will continue into retirement, the Bank’s Financial Policy Committee (FPC) found.
By opting for longer mortgage terms, Britons could keep their monthly payments down in the face of higher borrowing costs, although this can increase the amount of interest they end up paying overall.
As more and more people opt for ‘marathon mortgages’ with terms over 30 years, households are left vulnerable to debt shocks as they acquire more interest.
The FPCs latest report said: “Longer mortgage terms mean a higher risk of debt being pushed into old age which could increase the risk of future consumption cut and defaults.
“For 40 per cent of new mortgages in Q4, borrowers would be past the state pension age at the end of their mortgage term.”
The Bank found that two fifths of these approved mortgage deals were to continue into one’s retirement
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The proportion of new mortgages on long-term deals of 35 years or more had increased by eight percent between 2021 and 2023 – from four per cent to 12 per cent. In this period, the Bank of England’s base interest rate rose from 0.1 per cent to five per cent.
The Bank found that two fifths of these approved mortgage deals were to continue into one’s retirement.
Although the longer term would release the pressure of high monthly mortgage payments, if the trend continues, it could lead to “greater persistence of household debt in the economy”.
This could “reduce the flexibility available for borrowers in the face of future shocks” and possible higher losses in the event of default.
The Bank said they are monitoring these risks closely and looking for signs of a “structural” shift.
More than 25,000 first time buyers took out mortgages with long terms between 30 and 35 years in the final quarter of 2023, according to UK finance.
As the cost of living crisis continues, and the base rate remains at 5.25 percent, lenders are aware they need to be flexible to accommodate borrower needs.
Moneyfacts data showed that 86 per cent of the mortgages currently available have the option of terms that span up to 40 years.
However, this is often dependent on the age at application.
Kellie Steed, mortgage expert at USwitch added that while it may not be possible to get a 40-year mortgage at age of 55, there is the very clear recognition from lenders that flexibility is needed in order to facilitate affordability for the average mortgage borrower this year.
Ms Steed said these figures reflect wider trends across the mortgage market and indicate that the ‘average’ 25-year mortgage term is increasingly becoming a thing of the past.
Lenders are cautious when allowing people to opt for mortgage terms which run into retirement as there is a higher risk when it comes to repayments.
In the past couple of weeks, Halifax have imposed a new 70-year age limit on thousands of homebuyers as banks seek to regulate mortgage lending.
The move will force thousands of borrowers to reduce the length of their terms in future, increasing their monthly mortgage payments as a result.
The changes are especially likely to affect people in their 40s and 50s who are seeking to maximise the length of their loan.
The change comes after the bank increased the working-age limit to 75 last summer.
Speaking to the Newspage agency, Darryl Dhoffer, an adviser at The Mortgage Expert said: “High mortgage rates and shorter terms are a recipe for disaster, pushing even more borrowers into debt and hardship.
“They only recently extended the term to 75, so to now reduce it back down to 70 seems a bit odd.”
