40-year mortgages prompt concerns over pension adequacy issues

Pension savers could be at risk of running out of money much earlier in retirement than expected if they are still making yearly mortgage repayments, Interactive Investor (II) has warned, amid an influx in 40-year mortgage products.

The firm noted that an increasing number of 40-year term mortgage products are becoming available, with the majority of these having a maximum age of 75, seven years after someone currently in their mid-thirties is likely to start receiving the state pension.

However, II argued that first time buyers in their mid-thirties who are considering long-term mortgage terms should "seriously consider" the potential implications on retirement plans, warning that they may have to contribute “significantly more” or be prepared to work for longer.

Analysis from the provider revealed that a 30-year old currently earning £27,500 is on track for a pension pot worth approximately £190,000 if they pay 8 per cent of their salary into a workplace scheme until they are 68, slightly below the £20,800 estimated to be needed for a moderate retirement income by the PLSA.

However, it also pointed out that, typically, retirement income scenarios assume that all housing costs are paid of, with longer-term mortgages likely to mean that an increasing number of retirees will have housing costs when they retire.

Considering this, based on average yearly mortgage repayments of £7,644, someone who has a mortgage to 75 would need private pension savings to deliver an income of £19,105, on top of their state pension, to age 75, to cover their living costs and mortgage.

In addition to this, it found that the pot worth £190,000 would run out at age 75 if it had to cover this full amount, leaving that person dependent on the state pension alone from that age, whilst without mortgage costs to 75, the pot would last until 79.

In light of the findings, II head of pensions and savings, Becky O’Connor, highlighted the rise of mortgages with "ultra-long" terms that stretch into retirement as "worrying", warning that it could require a "fundamental rethink" of what people will need in retirement.

She commented: “If you are considering paying a mortgage into retirement, there’s a huge reality check coming: you will need a much bigger pension than most people are currently on track for to finance this additional borrowing.

“Generally, mortgage brokers don’t interrogate people on their retirement plans, asking only at what age someone plans to retire as part of the application process.

"It’s very hard for both borrowers and brokers to know at what age they will end up retiring though, and whether they will have enough pension to cover repayments, if they have to give up work earlier than they initially thought when they were applying for the loan.

"It’s hard to project this far into the future when you are in your thirties and you may have an optimistic view of what you will be capable of, workwise, when you are 70. The difficulty is being able to guarantee the ability to continue working until 75, even if that is someone’s intention four decades earlier.

“When the auto-enrolment minimum was set it really was a minimum and assumes that it will provide enough in retirement for the average earner who also receives a full state pension and doesn’t have any housing costs when they retire.

"Unfortunately, the development of longer-term mortgages and the rise of private renting call these assumptions into serious question. If people have housing costs when they retire, they will either need a bigger pension or be able to work for longer – or face running out of money sooner.”

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