Banks accused of ‘irresponsible lending’ as buyers face emptying pensions to pay off mortgages

Banks offering ultra-long 40-year mortgages are guilty of “irresponsible” lending, experts have warned.

As interest rates have risen, long-term mortgages with lower monthly repayments have grown in popularity, fuelled by young buyers desperate to get onto the housing ladder.

However, Sir Steve Webb, a former pensions minister, said banks had no way of knowing whether mortgages would continue to be affordable in retirement.

He added: “If you are lending to someone in their 30s, it’s pretty much impossible to know what their pension will be – so how can any lender be confident the mortgage will be affordable decades in future?

“The borrower is taking the risk here – they are the ones who will have to empty out their pension pot to clear off any remaining mortgage balance. There is a risk of irresponsible lending.

“The young borrower just wants a house, they want to stop paying rent and start on the housing ladder, and if paying into retirement is the cost, then they will just sign on the dotted line.

“Lending into retirement should be the exception, not the norm for young borrowers. The lender has to be more responsible. If nearly one in two mortgages now go beyond the state pension age [of 66], then something’s gone wrong.”

It comes after Bank of England figures showed that over two fifths of borrowers (42pc) are now taking out mortgages that will not be paid off until retirement, up from less than a third (31pc) in 2021, when rates were at record lows.

The number of home buyers under 30 taking out these mortgages more than doubled over this period – the steepest rise of any age group.

The Bank of England’s Financial Policy Committee warned in March that a rapid rise in longer term home loans above 30 years risked leaving households more vulnerable to debt shocks, and of debt being pushed into old age. Some banks now offer mortgages with terms of up to 40 years.

The average mortgage term for first-time buyers in Britain is now 30.8 years, up from 27.5 in 2014, according to UK Finance, the banking trade body.

Pete Mugleston, of Online Mortgage Adviser, questioned whether long mortgage terms were in the best financial interests of young borrowers.

He said: “This trend highlights the growing financial strain faced by younger generations who are willing to commit to extended repayment periods in exchange for the opportunity to secure a place on the property ladder.

“However, this strategy poses risks, and could jeopardise their ability to save adequately for retirement, leaving them vulnerable to financial challenges later in life.

“We must thoroughly scrutinise whether these lending practices align with the financial wellbeing and long-term goals of those seeking mortgages.”

Lord Tyrie, former chair of the Competitions and Markets Authority and the Treasury Select Committee, said homeowners taking out ultra-long mortgages needed to be made aware of what they are signing up to.

He added: “In general, the greater the choice the better it is for consumers. But it is crucial that the terms of the loan, and its implications, are fully explained at the start.”

However, Baroness Altmann, a former pensions minister, said the availability of 40-year terms was a good thing for house buyers.

She added: “[Banks] are trying to give people the opportunity to buy a house with mortgage rates going up. It’s a way of getting on to the housing market. Nobody stays at their property for 40 years – most will either sell or remortgage at a lower rate.”

Lenders are becoming increasingly wary about people borrowing into retirement. In March, Halifax imposed a new 70-year age limit on thousands of homebuyers as banks seek to rein in risky mortgage lending.

The changes apply to those who are increasing the size of their mortgage, or who have relatively weak credit ratings. If these people want to borrow past the age of 70, they will have to prove they can cover their costs with a pension.

Karina Hutchins, of UK Finance, said: “The proportion of longer-term mortgages has been increasing in recent years as buyers look for ways to stretch their affordability.

“When reviewing new mortgage applications, lenders will act within the responsible lending rules set by the Financial Conduct Authority and carefully consider whether the borrower will be able to afford their mortgage in the future.

“This will include whether the requested term would take the borrower beyond their anticipated retirement age. Where this is the case, it is common practice for lenders to request proof of pension.

“Those closer to retirement, usually within 10 years, may need to satisfy their lender that they can afford the mortgage based on their retirement income.

“Whilst longer mortgage terms can offer lower initial monthly repayments, the borrower will pay more in interest and have less disposable income to put into their pension if the mortgage runs for its full term.”