According to a new report, many homeowners desperate to climb the real estate ladder have taken out longer mortgage repayment terms because they felt they were more affordable.
According to Sprive, a mortgage overpayment app, over 3 million people in the UK expect to pay off their mortgage once they retire.
Jinesh Vohra, Sprive’s founder and CEO, described it as a “ticking time bomb” that needed to be brought to light as many of the borrowers will struggle to pay off their mortgages when they retire.
According to the study, 19% of the 3 million respondents fear they will not be able to repay their loans if their income falls after retirement.
Sprive discovered that the number of available 40-year mortgages increased from 57 percent to 59 percent between 2019 and 2022, according to data from Moneyfacts.
Although the number of 40-year mortgages taken out had not increased significantly, there was concern that so many were available and that many people were simply unaware of the risks involved with such a long-term loan.
In January 2022, the average age of a first-time buyer was 32, according to Hаlifax.
Sprive explained that in this case, the mortgage would not be paid off until the borrower was in their early 70s.
The current state pension age is 65, but will be raised to 67 in 2028.
Sprive said it will work with the FCA to ensure people are aware of the dangers of being burdened with monthly mortgage payments once they are no longer employed.
“40-year mortgage terms have become the norm in recent years, as a desperate measure to enable affordability even as the overall cost of home ownership has risen dramatically,” Mr Vohra said.
Longer terms were allowed by lenders because they allowed more people to get mortgages, he explained.
“However, millions of Britons will be retired and still owe mortgage payments that they cannot meet.”
According to Sprive, borrowers should also consider interest costs over the life of the loan.
The higher the interest paid, the longer the loan will be repaid.
“We urge lenders to do more to support these people by being transparent about the additional costs and weighting of interest payments on the earlier portion of the mortgage,” Vohra added.
“This should go hand in hand with encouraging and facilitating overpayments, particularly in the early years when they will have the greatest impact.”
Overpayments are an example of how a mortgage can be shortened.
Overpaying a mortgage can shorten the life of the loan and ensure the borrower doesn’t go into debt when they retire.
For example, an overpayment of £10 a day or £300 a month could cut the length of their mortgage by 14 years and 11 months and save £45,311 in interest.
The calculations below are based on a £250,000 40 year mortgage at 2% interest.
Overpayment: The mortgage payment is reduced by: Savings:
£19,210 for 6 years and 1 month at £3 per day (£90 per month).
£150 per month (£5 per day) 9 years and 2 months £28,433
£45,311 14 years and 11 months £10 per day (£300 per month)
Total Interest Paid = £113,487
If the same mortgage were taken out over 25 years, the total interest would be just £67,947.
According to Moneyfacts, 398 mortgage products from 41 providers allowed people to overpay their mortgage without paying an early repayment fee on April 1, 2022.
“These numbers reveal the enormous amounts of money at stake,” said Mr. Vohra. Lenders earning almost twice as much interest on a same-size mortgage loan — and the critical importance and impact of borrowers overpaying early to shorten the life of their mortgage.”
https://technotrenz.com/news/taking-out-40-year-mortgages-puts-millions-of-people-at-risk-of-poverty-in-retirement-1788394.html Taking out 40-year mortgages puts millions of people at risk of poverty in old age.