The majority of 40 year mortgages have a maximum age of 75 years. This is seven years after someone in their mid-thirties will currently be receiving the state pension and 12 years above the UK average healthy life expectancy, according to the National Statistics Office.
Interactive Investor cautions homeowners, including first-time buyers in their mid-thirties, who are considering long mortgage terms, to think seriously about the implications for their retirement savings.
They may need to pay significantly more into their pensions to cover mortgage repayments after retirement or be willing to work longer hours. However, illness and other life events often prevent people from working longer, even when they are intentional.
In later life this could put mortgage lender at risk of being unable to make their repayment in old age.
Respondents to the interactive investor Great British Retirement Survey had an average age of 60 years and an average mortgage life of 11 years.
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According to calculations by the interactive investor, a 30-year-old currently earning £ 27,500 is on track for a pension pot worth about £ 190,000 if he pays eight percent of his salary into a workplace system by the age of 68.
The Pensions and Lifetime Savings Association (PLSA) estimates that £ 20,800 per year is enough for a moderate retirement income, including the state pension.
Interactive Investor calculates that, based on an average annual mortgage repayment of £ 7,644, a person with a mortgage of £ 75 will need a private pension to earn £ 19,105 on top of their state pension by age 75 to cover their cost of living to cover and mortgage.
The £ 190,000 pot would be used up by the age of 75 if he had to cover that full amount, leaving that person solely dependent on the state pension from that age. Without mortgage costs up to 75, the pot would go up to 79, with PLSA a moderate income.
Becky O’Connor, Interactive Investor’s Head of Pensions and Savings, said, “The rise in ultra-long mortgage lending rates well beyond retirement age is worrying.
“It will require a profound rethinking of what retirees need and could require a change in the assumptions underlying the current guidelines for retirement savers about how much they should have in their pot.
“If you’re considering a retirement mortgage, there’s a big reality check ahead of you: you’re going to need a much larger pension than most people are currently on the right track to fund that extra borrowing.”
Ms. O’Connor believes that when people take out a long-term mortgage loan, people don’t get enough consideration for retirement.
She said, “Generally, mortgage brokers don’t ask people about their retirement plans, they just ask what age someone would like to retire as part of the application process.
“However, it is very difficult for borrowers and brokers to know what age they will end up retiring and whether they will have enough pension to cover the repayment if they have to quit their jobs earlier than they originally did when applying for loans thought.
“It’s hard to project that far into the future when you’re in your thirties and maybe optimistic about what you can do professionally at 70. The difficulty lies in being able to guarantee the ability to continue working. “Up to 75, even if someone intended that four decades earlier.”
Ms. O’Connor is concerned that the auto-enrollment help is not enough to ensure adequate retirement, especially for people who may still have a mortgage to pay.
She explained, “When the auto-enrollment minimum was set, it really was a minimum and believes it will be sufficient in retirement for the average earner who also receives a full state pension and has no housing costs in retirement.
“Unfortunately, the development of longer-term mortgages and the rise in home rentals are seriously calling these assumptions into question. When retired people have housing costs, they either need a higher pension or can work longer – or their money runs out sooner. “