In a market which has tended to work on short-term delivery, with a focus on two/three-year mortgage deals, it’s important not to forget the long-term nature of paying off a mortgage.
It’s been therefore interesting to hear that more borrowers are looking at ‘longer-term’ deals in the current environment – wanting to ensure some degree of longer-term payment certainty while the UK tries to work out just which way the wind is blowing with Brexit, and what that mean for the economic prospects of every individual.
That longer-term approach is clearly a consideration for borrowers but I often wonder just how possible it is to consider your future mortgage, how much it might be, at what point you might be mortgage-free, etc, when you’re a first-time buyer in your 20s or 30s who just wants to get into that first property. 25-years plus will seem a very long way away for them.
The FCA’s recent sector review however does draw out some interesting points around mortgage terms that, we as a sector and borrowers as a whole, are going to need to consider because they don’t just impact on the ‘mortgage life’ of a person but also their ability to plan and prepare for their later life.
There is a growing interconnectedness between the generations when it comes to getting a foot on the property ladder but what about securing a mortgage now which is going to take you past state retirement age? Which may well mean you’re unable to save in a pension? Which therefore might make retirement more difficult, especially if you’re also still paying that mortgage off during those years?
The FCA research reveals that 40% of all borrowers who secured a mortgage in 2017 will be over 65 years of age when that mortgage term comes to end. Now, we might well argue that traditional notions of retirement no longer cut the mustard – the state pension age continues to rise, people are living longer, people are therefore working longer, and that having a mortgage in later life/retirement is no longer a ‘no no’ and is indeed part of the natural changes we’ve seen in UK work/retirement life.
And of course, there is a lot of truth in this but what perhaps might worry the FCA is the significant growth in this statistic – back in 2012 the number was just 22% and if you wanted to understand the difficulties first-time buyers have had over the last five years, then this would be a strong example to use. The notion of a 25-year term – especially for first-timers – is becoming less relevant with lenders offering 30/35/40-year terms being offered. Indeed, the FCA now says that a 30-year term is the norm and I would suggest that is likely to rise in the future.
Now, first-timers seem to be willing to sign up for such terms based on the fact that they get the mortgage, they meet affordability measures, and they get that first home. But, the mortgage as we know is not the only financial commitment for individuals and, in a world which personal financial responsibility is growing across the board – especially in terms of retirement – the regulator is clearly worried that larger mortgages/longer terms will not allow people to adequately prepare and save for their later life years.
Indeed, this looks like an issue that is only going to get worse because we have people now having to wait until far later in life to even get on the property ladder. Rental costs have increased, which means saving for a deposit is harder, which means that saving for a pension might not be prioritised. It is no wonder that the government has focused so much on auto-enrolment but what about those many millions of people who are self-employed? How do they buy a first home and save for a comfortable retirement?
The FCA talk about a lack of ‘financial resilience’ and an inability to withstand ‘financial shocks’ resulting from this, and while some might hold the argument that the home itself can also be the pension, it’s going to require significant improvements in house price inflation to deliver that. Plus, by the time retirement is reached, one wonders just how many financial commitments the home will be called upon to meet – helping family members, meeting long-term care needs, paying off debts, updating homes for retirement living, the list goes on. Will these properties have the necessary equity within them to do all this and more? It’s doubtful.
It’s an area which advisers probably need to be working through with their clients. Buying a home is important but so is preparing for retirement – we can’t simply assume that the house will grow in value sufficiently or that the safety nets that still (to some extent) do exist now are going to be there in 30/40 years. The trend is that they will not.
One suspects the FCA will not want to see a generation – which has already been stuck behind the eight ball when it comes to buying a first home – subjected to a future in which they have a retirement not worth living. Or one which they have not adequately saved for because they have put all their eggs in the housing basket. It’s a circle that needs to be squared and I suspect we’re going to need to hear a lot more on this from the regulator in order to find a satisfactory outcome.
Pad Bamford is business development director at AmTrust Mortgage & Credit