Longer-term mortgages are on the rise amid financial stability risk concerns

Longer-term mortgages have become increasingly popular over the past two decades, but the Bank of England is wary about their possible financial stability risks.

In the first quarter of 2024, half of new mortgages had terms of 30 years or longer, up from just 12 per cent in the final quarter of 2005.

The term refers to the length of time over which a mortgage is repaid, which is different to the period over which an interest rate is fixed.

These mortgages are most prevalent among younger borrowers and first-time buyers. 81 per cent of mortgages taken out by borrowers under 35 in the first quarter of this year had terms of 30 years or more.

Taking out longer terms generally means borrowers can lower their monthly repayments, helping to offset higher interest rates and cost-of-living pressures.

However, regulators are wary about the possible macro impacts of the rise of long-term mortgages.

In a blog post officials at the Bank of England drew attention to “risks which could build over time if the trend continues.”

Longer-term mortgages can push repayments past the state retirement age, when income is likely to be lower or more uncertain. Borrowers also have less flexibility to extend terms in response to a future interest rate shock, which could reduce borrower resilience.

By extending terms, borrowers also take on more debt in total while a larger share of their repayment will go towards paying interest rather than the loan principle.

“Borrowers on longer-term mortgages pay more interest over the life of their loans. And all else equal these borrowers will reduce their loan to value ratios (LTVs) slower,” the Bank said.

However, Bank officials argued that the financial stability risks from long-term mortgages were “relatively small” due to restrictions on lending.

It pointed out many lenders have their own rules on lending into old age and the Financial Conduct Authority (FCA) requires banks to take into account likely changes in income, including due to retirement.

“The FCA’s responsible lending rules and lenders’ own policies likely contribute to limited lending deeper into retirement,” it said.

Bank of England regulations also limit the amount of new mortgage lending that can be extended at high loan-to-income ratios at each bank. This “limits risky borrowing in the aggregate,” it said.

Given these restrictions, Bank officials said the “risks associated with longer-term mortgages are limited”.