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Risk to retirement of 40 year mortgage terms

Journalist: Marc Shoffman, Freelance

ended 30. August 2023

Standard Life has released research warning that 40 year mortgages could squeeze people's retirement plans. It highlights that there are retirement benefits to paying off your mortgage as early as possible and maximising pension contributions as you get older and can afford more closer to retirement.

I am writing about this for MoneyWeek this afternoon and am after comments looking at if mortgage borrowers should consider their retirement income and pensions when taking out a 40-year mortgage. Is there an argument for borrowing for 40 years but then reducing the term with overpayments as you get older and earn more. Would this then give savers more over the long term to put into a pension?

 

Kind regards, Marc

9 responses from the Newspage community

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Stephen Perkins
Managing Director at Yellow Brick Mortgages
The biggest threat is that most people do not have retirement plans. Those in their 20s-30s now, will likely have no state pension or have to wait til they are over 70 to receive it, and the workplace pensions simply will not provide enough for any type of comfortable retirement to most. Therefore the work until you die is the new default, so why not continue to have a mortgage?
40-year mortgage terms are not new, they have been on offer for years, they are just more popular now, due to the increased rates to keep mortgages affordable. No one takes one with the plan to keep it for 40 years, most will look to over-pay, or reduce the term on a future remortgage when rates or their income allow. After all the average person moves house every 7 years so it is all subject to change. If they do end up with a mortgage at retirement, then perhaps a retirement interest only or equity release will be the norm at that point.
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Ross Lacey
Director & Independent Financial Adviser at Fairview Financial Management
Most borrowers taking 40 year terms do plan to reduce the term in future through overpayments/reducing the term if/when rates are lower. This is something we saw happen in real life over the past few years when interest rates were low and borrowers were happy keeping payments the same as before to reduce their term. The reverse is happening now with some extending the terms of their mortgage to soften the blow from higher rates.

Lower mortgage payments today, mean more ability for people to continue with pension contributions rather than stopping or reducing them because their mortgage payments are so high.
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Rohit Kohli
Director at The Mortgage Stop
The conversation we have with clients who are considering a 40-year term includes discussing how will a 40-year term impact their long-term plans, when could they put in place a plan to help them overpay on their mortgage to reduce the overall cost of the mortgage and, in the future, do they see their disposable income growing to allow them to be in a position to reduce the mortgage term when they remortgage? The overall cost of the mortgage will be higher, often by thousands of pounds, when compared to a shorter term so as advisers we have to make sure clients consider all angles. I would be wary of advising on a 40-year term where it takes the client into retirement without a pension plan already in place but if you're a young professional, starting out your career with the potential for your income to grow then a 40-year term could be a great way to get you onto the property ladder.
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Elliott Benson
Owner at Sett Mortgages
The majority of clients who I see taking 40 year mortgages are in their early twenties and so the mortgage would naturally come to an end before 68, it is unlikely clients at this age would stay with the same mortgage for 40 years. They will move, re-mortgage and eventually most likely downsize. With each move or re-mortgage, the term may be changed to suit new budgets etc.

I think taking a longer term and having the choice to overpay is becoming much more popular as opposed to taking as short a term as possible and not being able to live month to month
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Scott Taylor-Barr
Principal Adviser at Barnsdale Financial Management
The term of the mortgage is a financial planning tool, just like any other. A 40-year mortgage term may be the appropriate way forward for a first-time buyer, with a review of that at their first remortgage, when it may be decided that they can afford to reduce the term, due to interest rates at that time or an increase in their income. Likewise, if someone is coming off an ultra-low interest rate deal and their new repayments are putting them under too much financial stress, a longer term can help alleviate that. Again, most mortgage brokers would do so with a view to reducing the term again at a future remortgage review once the client is more comfortable with their new costs. I would be very surprised if someone took on a mortgage in their 20s on a 40-year term and maintained the same term at every step of the mortgage life thereafter.
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Rhys Schofield
Brand Director at Peak Mortgages and Protection
Anyone extending a mortgage term should look very carefully at the total amount they will have to repay to clear their mortgage in the end. Those extra few pounds a month may be nice now, but if they leave you having to pay sometimes tens of thousands more in interest overall, it may not be such a wise move.
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Peter Stamford
Mortgage Expert at Stamford Home Finance
I completely understand why borrowers would consider a 40 year mortgage. Lower monthly payments are very alluring while rates are so high. Consumers optimistic about their future spending power will understandably like the idea of paying less each month, which allows for overpayments when possible and shortening the term upon remortgage. But beware, homeowners may intend to overpay, but life is what happens while you're busy making plans and the road to hell is paved with good intentions.
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Ashley Thomas
Director at Magni Finance
If you are looking to get a 40 year term, the most sensible option would be to overpay and/or reduce the term in the future when it is more affordable. Most clients looking at a 40 year term will be young people below 35 where the mortgage will finish before their retirement, therefore they don't need to worry about pension income to cover the mortgage payments.
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Chris Anderson
Financial Adviser at EM Gray
For many young people getting onto the property ladder is a struggle and with longer mortgage terms this could make the difference of being able to secure a mortgage or not. It is important however that if you do decide to take on a debt with a 40 year term that this is managed in a way that best suits your needs so it is not detrimental in the long term. The ideal scenario is that as you grow older you will earn more, giving you the ability to overpay your mortgage or reduce the term when you come to re-mortgage which will reduce the overall interest paid and by managing this process properly it can be advantageous for buyers who didn't quite meet the affordability on a shorter term. The flip side is that you dont have the ability to overpay and you're left paying a debt well into your 70's which will have incurred a huge amount of interest over the term and potentially left you unable to fund the retirement you wanted. Good holistic advice is important when considering such options.