Buyers opting for a 40-year mortgage term should consider the impact on their retirement plans, Interactive Investor has warned.
This week Kensington Mortgages launched a range of products that allow borrowers to fix their rate for between 11 and 40 years, but there is also a trend for buyers who take out shorter-term fixed rates to opt for a 35 or 40 year repayment plan in order to stretch their affordability further.
While this might be the right choice for many, buyers should bear in mind that borrowing over a longer term will increase their total interest bill and it could also delay their retirement plans.
According to calculations by Interactive Investor, a 30-year old currently earning £27,500 is on track for a pension pot worth approximately £190,000 if they pay 8% of their salary into a workplace scheme until they are 68.
The Pensions and Lifetime Savings Association estimates that £20,800 a year is enough for a moderate retirement income, including the state pension.
Interactive investor calculates that based on average yearly mortgage repayments of £7,644, someone who has a mortgage to 75 would need private pension savings to deliver an income of £19,105, on top of their state pension, to age 75, to cover their living costs and mortgage.
The pot worth £190,000 would run out at age 75 if it had to cover this full amount, leaving that person dependent on the state pension alone from that age.
Without mortgage costs to 75, the pot would last until 79, at the PLSA moderate level of income.
The Great British Retirement Survey found that 9% of retired people are still paying off a mortgage, while 1.5% are renting privately.
Of those with a mortgage, 40% are on capital repayment loans and 48% have interest-only mortgages.
Interactive Investor head of pensions and savings Becky O’Connor says: “The rise of mortgages with ultra-long terms that stretch way past retirement age is worrying.
“It requires a fundamental rethink of what people will need in retirement and could require a change to the assumptions that underpin current guidance for pension savers on how much they should aim to have in their pot.
“If you are considering paying a mortgage into retirement, there’s a huge reality check coming: you will need a much bigger pension than most people are currently on track for to finance this additional borrowing.
“Generally, mortgage brokers don’t interrogate people on their retirement plans, asking only at what age someone plans to retire as part of the application process.
“It’s very hard for both borrowers and brokers to know at what age they will end up retiring though, and whether they will have enough pension to cover repayments, if they have to give up work earlier than they initially thought when they were applying for the loan.
“It’s hard to project this far into the future when you are in your thirties and you may have an optimistic view of what you will be capable of, workwise, when you are 70.
“The difficulty is being able to guarantee the ability to continue working until 75, even if that is someone’s intention four decades earlier.
“When the auto-enrolment minimum was set it really was a minimum and assumes that it will provide enough in retirement for the average earner who also receives a full state pension and doesn’t have any housing costs when they retire.
“Unfortunately, the development of longer-term mortgages and the rise of private renting call these assumptions into serious question.
“If people have housing costs when they retire, they will either need a bigger pension or be able to work for longer – or face running out of money sooner.”