Longer Mortgage Terms Risk Retirement Debt Crisis, Warn Bank of England Staff

 

Introduction

In a recent blog post on Bank Underground, analysts at the Bank of England have raised concerns about the increasing trend of homeowners borrowing on mortgages later in life.

This trend, they warn, could trigger a retirement debt crisis, posing significant risks to financial stability.

Rising Trend of Ultra-Long Mortgages

The Bank of England's data shows a sharp rise in the share of new mortgage lending extending beyond the state pension age of 67.

During the first three months of 2024, this share surged to 42%, up from around a quarter before the COVID-19 pandemic. This increase is driven by spiralling house prices and stagnating incomes, pushing borrowers to take on ever-longer mortgages.

Financial Stability Risks

The analysts argue that longer mortgage terms could affect financial stability by pushing debt repayments beyond retirement, where incomes are less certain.

This reliance on less predictable pension incomes to meet repayments could undermine the financial system over time. Borrowers on longer-term mortgages pay more interest over the life of their loans, and they have fewer options if they find themselves in financial difficulties.

Impact on Younger Generations

The surge in ultra-long mortgages is most prevalent among younger borrowers and first-time buyers.

Home ownership rates among those in their mid-20s to mid-30s have fallen by 20 percentage points since the turn of the millennium to 39%. Soaring rents and living costs have made it more difficult to save for a deposit, with nearly two-thirds of first-time buyers in the past five years relying on the "bank of Mum and Dad".

Short-Term Benefits vs. Long-Term Consequences

While longer mortgage terms lower monthly repayments, making them more affordable in the short term, they come with longer-term consequences.

Borrowers end up paying more interest over the life of their loans and take longer to pay back their mortgages. This could lead to greater debt persistence and financial challenges in retirement.

Regulatory Measures and Lender Policies

The Bank of England's staff noted that tight lending criteria and responsible lending rules likely limit the overall risks to the financial system.

Many lenders have their own rules on lending into old age, and the Financial Conduct Authority (FCA) requires banks to take into account likely changes in income due to retirement. These measures help mitigate some of the risks associated with longer-term mortgages.

Conclusion

The Bank of England's warning highlights the need for careful consideration of mortgage terms and their long-term implications. While longer mortgage terms may provide short-term relief, they could lead to significant financial challenges in retirement. Policymakers and lenders must work together to ensure that borrowing practices do not undermine financial stability and leave homeowners vulnerable in their later years.

Tax Investigation Insurance

Market leading tax fee protection insurance for businesses, sole traders and individuals. Protect yourself from accountancy fees in the event of an HMRC enquiry.

Having a Solar Protect Tax Investigation Insurance policy at your disposal means that should you be one of the many 1000's of businesses or individuals that are selected by HMRC each year to look into your tax affairs your own accountant (your tax return agent) can get on and defend you robustly.

You have the peace of mind knowing that your accountant's (your tax return agent) fees will be paid by the insurance without any Excess for you to find.

Tax Investigation Insurance is an insurance policy that will fully reimburse your accountant's (your tax return agent) fees up to £100,000 if you are subject to enquiry by or dispute with HMRC.

A Solar Protect policy will enable your accountant (your tax return agent) to:

• Deal with any correspondence from HMRC
• Attend any meeting with HMRC
• Appeal to the First-tier Tribunal or Upper Tribunal
• Having the security of knowing that fees will be met in full will enable your Accountant (your tax return agent) to defend your position robustly

Please click here for details.