Four-decade-long mortgages will ‘come home to roost’ with households left with less money in retirement, trade body warns

Ultra-long mortgages will ‘come home to roost’ as households are left with less money towards retirement, a trade body has warned.

Borrowers are increasingly taking out home loans lasting up to four decades as they struggle to get a foot on the housing ladder amid rising prices.

One in five mortgages for first-time buyers is for a term longer than 35 years – twice the proportion seen just two years ago. In 2005, it was only 2 per cent.

‘The longer a customer needs to make mortgage payments, the less free income they may have over this period for other important considerations, not least contributions into their pensions,’ according to a report by UK Finance.

‘This trend of longer-term borrowing has the potential for wider societal implications, albeit that these may not come home to roost until some years down the track.’

The comments, in a quarterly review of household finances, said this was an example of the ‘affordability crunch’ facing borrowers.

Ultra-long mortgages began to snowball in the wake of Liz Truss’s mini-Budget in September 2022 when borrowing rates soared.

At the start of that year, loans stretching more than 35 years represented just 8 per cent of first-time buyer mortgages. But that rose to 17 per cent by the end of 2022 before peaking at 23 per cent in December last year.

Although mortgage rates have eased from their highest levels, the proportion of extra-long deals was only down to 21 per cent in March.

UK Finance said the proportion of loans with terms up to 40 years ‘remains far higher than we have seen in the past’ for ‘all types of borrower but most significantly among first-time buyers’.

Many homebuyers will not keep the same deal over the full term, often moving house or switching to a new loan, it added. ‘However, the small but increasing minority of both home mover and remortgage customers borrowing at these longer terms points to more entrenched affordability issues,’ the report said.

‘Rather than just stretching terms as a means of improving affordability to enter the market, more customers are needing to do this in subsequent mortgages, further on in their homeownership journeys and working lives.’

David Hollingworth, an associate director at broker L&C Mortgages, said: ‘Taking a mortgage over a longer term may help with the initial monthly payments but the cost will mount up substantially over time.

‘Borrowers need to be disciplined in reviewing the term, or overpaying wherever possible, to reduce that burden.

‘If not, it will continue to have a bigger impact on disposable income for longer, which could have knock-on consequences for saving and for resources in retirement.’

Former pensions minister Baroness Altmann said: ‘If the only option for people is to get a longer-term mortgage then for many that is better than paying rent which will also prevent them saving.

‘The issue for me is to ensure lenders don’t profiteer on these long-term loans as borrowers do end up paying back more the longer the term.’

UK Finance added that the wider mortgage market remained constrained in the first quarter of 2024.

Borrowing was down on the same quarter of last year, despite signs in 2023 that the market was picking up.

Eric Leenders, managing director of personal finance, said: ‘Some households were in a better place financially in Q1 this year but we are not out of the woods yet.’