Increasing numbers of people are opting for longer-term mortgages, raising the risk of having to pay off the debt into retirement.
There has been a “surge in mortgage terms beyond state pension age”, said BBC News, as higher home loan pricing is pushing people to “choose an extended repayment period to control costs”.
A longer term reduces the monthly repayments on a mortgage but means paying more overall.
This means mortgage borrowers are taking terms of 35, 40 or even 45 years, “stretching into retirement and beyond”, said the Daily Express, and potentially causing “severe financial problems further down the line” when people need to fund their retirement.
Former pensions minister Steve Webb, now a partner for financial consultancy LCP, which conducted the research, said younger buyers are “gambling with their retirement prospects by taking on ultra-long mortgages”.
Here are the pros and cons of mortgages, particularly if you may still be making repayments in retirement.
Pro: purchase your own home
A mortgage helps you get on the property ladder “without needing to save up the full purchase price up front”, explained MoneySuperMarket.
Borrowers pay a deposit and then make repayments every month. These repayments are based on the interest rate and deal term.
Con: major financial commitment
Buying a home is “the biggest financial commitment” most people have in their lives, said the HomeOwners Alliance. It is not something you can “easily escape from”.
In addition, your home may be repossessed by the lender if you cannot afford to repay your mortgage, if, for example, you lose your job.
Pro: build equity
You will be building equity in the property the more you pay off the mortgage, said Hopkins Homes, “which can increase your net worth over time”.
Equity can be built faster if overpayments are made through a lump sum or higher monthly payments. Each provider will have rules concerning how much can be overpaid.
Con: risk of negative equity
A property is classed as being in negative equity “if it’s worth less than the mortgage you took out on it”, explained MoneyHelper.
It is “normally caused by falling property prices”, added the financial website, and may affect those with interest-only mortgages where the actual debt isn’t being repaid or if you have taken out a home loan with a small deposit and the value falls below the amount of the mortgage loan.
Negative equity becomes a problem if you want to sell, said Reallymoving, as you would “need to pay back your mortgage lender”, but there may not be enough money raised from the transaction to settle your debt.
Pro: cheaper than renting
Buying a property is cheaper than renting “despite higher mortgage rates”, said ThisIsMoney.
Research by estate agent Hamptons for the financial website found that based on a mortgage rate of 4.38% at 90% loan-to-value, a £200,000 mortgage over 30 years would cost £999 a month for the first five years.
In contrast, average rents have hit a “new record” of £1,280 a month outside London – based on Rightmove figures.
Con: extra costs
When it comes to mortgage borrowing, “it’s not just the interest rate” you need to consider, said MoneySuperMarket.
There are other costs to save for such as a deposit, arrangement and valuation fees and conveyancing costs, as well as early repayment charges if you want to pay off the home loan before the deal period ends.
You may have to pay stamp duty, in England and Northern Ireland, although first-time buyers are currently exempt on the first £425,000 of the property tax on purchase worth up to £625,000.
As a homeowner, you are also responsible for “insurance, maintenance and improvements”, added the HomeOwners Alliance so “you can’t just phone up the landlord asking them to fix the boiler.”
Pro: flexibility
From fixed rates over two years, five years or longer, and trackers, mortgages have various terms and repayment options to suit different budgets and goals.
There is likely to be a mortgage deal “that’s ideal for your circumstances”, said WhatHouse?
Depending on the rate, added the financial website, spreading the payments on a monthly basis “could well be much lower than the rent you would pay in your area”.
Con: risk of borrowing into retirement
Taking out a longer-term mortgage can be “more attractive when interest rates are high”, said Sky News, as monthly repayments are lower. Many lenders let borrowers take a mortgage over a term of up to 40 years.
A 25-year £200,000 mortgage on a fixed rate of 5% would cost £1,169 per month but that drops to £964 over a 40-year period.
But people taking out longer loans could still end up with mortgage debt in retirement, said MoneyWeek, putting them “at risk of poverty in old age”, especially if they find it harder to work as they get older, but still need to repay the loan.
Steve Webb told the publication if people still have a mortgage as they retire, their “instinct will be simply to tip out their (already inadequate) pension pots to clear the mortgage balance”.
It is possible borrowers will find the mortgage more manageable before they retire, the financial website added, as “their income may rise, they may move house, and they could swap their long-term mortgage for a shorter one”.