Brokers are divided over the risks posed by lengthening mortgage terms after Prudential Regulation Authority chief executive Andrew Bailey warned over potential dangers as incomes drop in retirement.
Speaking during a Treasury select committee hearing last week, Bailey raised concerns that the trend could leave borrowers facing problems maintaining their payments if their income falls in retirement.
He said: “We have to watch this very carefully because if mortgages extend beyond the point at which income falls off, then we have a long-term problem.”
FCA data shows average mortgage terms have risen from 26.2 years in 2009 to 27.2 years as of March 2014.
Martin Taylor, an external member of the Bank of England’s Financial Policy Committee, said he was surprised how much mortgage terms had increased since the 1990s, when a typical mortgage would be spread over 20 to 25 years.
“The beauty of a relatively short mortgage term is if the borrower got into trouble it is reasonably easy for banks to show forbearance by lengthening it,” he said.
“Where we are, even with people working into their 80s, it has become more difficult.”
Brokers are split over the threat that longer mortgage terms present to both consumers and the industry.
Middleton Finance managing director Daniel Bailey says the removal of the default retirement age in 2011 has created extra uncertainty for lenders and argues the issue of affordability in retirement needs to be addressed.
He says: “It is a worry. Borrowers are taking on this debt for longer and sooner or later that becomes an issue because people eventually retire. We are all generally going to be working longer but lenders still need to see evidence that when a borrower does retire, they will still be able to afford the mortgages they have taken out. It could get tricky.”
Your Mortgage Decisions director Dominik Lipnicki says borrowers are being forced to spread their payments over longer periods because house prices are rising much faster than wages.
“Without a doubt, 30- or 35-year mortgages are becoming the new 20- and 25-year terms,” he says. “People will borrow for longer as house pri-ces continue to rocket – which they will until the supply-side issues are seen to.
“The market certainly needs to reflect the fact that people are working for longer and living longer. Policymakers need to help the situation by actually building the extra houses they so often talk about.”
Bailey and Lipnicki agree the trend of rising mortgage terms could lead to difficulties for borrowers and say the industry should be monitoring the situation.
Bailey says: “The industry needs to address the issue before we find out that thousands of -people are stuck in this situation.
“We need clearer guidance from the regulators or from lenders to say where we are in terms of retirement ages.
“When lenders all have different criteria as to the age at which they will lend to, it becomes more complicated.”
Lipnicki adds: “It’s not a new thing – the industry absolutely needs to look at what’s going on and not just wait until this becomes a larger problem. Lenders should look at whether it is necessary to have restrictions on the age they lend to.”
However, Coreco director And-rew Montlake argues spreading mortgage payments over a longer period is the best solution for many borrowers.
“I see nothing wrong at all with taking out a mortgage and spreading the payments over longer terms – in many circumstances it is the best option,” he says.
“Giving someone a 30- or 35-year mortgage does not necessarily mean you are lending to them into their retirement. If Andrew Bailey is warning about the fact that longer-
term mortgages are becoming increasingly common, that is a little misguided. They alone don’t pose a risk.”
John Charcol senior technical manager Ray Boulger agrees that providing loans over a longer period can often be the right choice for borrowers and points to the likely change in circumstances that will take place over the course of the mortgage term.
Boulger says: “Hardly anybody keeps the same property for 35 years but even if they did stay in the same home on the same mortgage for the full term, it is very unlikely that there will be no inflation, no wage increase or no equity appreciation.
“If the loan carries over into the borrower’s retirement. say, after 20 or 25 years, the option will almost certainly be there to downsize and redeem the loan. I don’t think it poses as big a risk as the regulators say.”
Boulger says the FCA has potentially created an incentive for borrowers to stretch mortgage terms by introducing stricter affordability checks in the Mortgage Market Review.
“If a borrower can’t afford a loan over 25 years under the new rules, they will look to bring the payments down by stretching out the loan,” he says.
“Whether or not that is an unintended consequence of the MMR I’m not sure but it will certainly contribute to the trend.”