35-year mortgages are bad news, lenders told

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Prudential Regulation Authority warns lenders of dangers of lengthening mortgage terms and requiring people to repay home loans in retirement.

The Prudential Regulation Authority (PRA) has warned lenders about the risk of increasing mortgage repayment terms so that more people will have to pay back loans from post-retirement income.

In a speech which was originally due to be delivered in May, but was delayed because of the general election, PRA chief executive Sam Woods cautioned lenders about offering longer mortgage terms.

He said the Bank had noticed a trend towards mortgage terms rising from 25 years to ’35 years or even longer’ in the market.

‘Of course, increasing the term reduces the level of each monthly instalment and makes the loan more affordable in the short term; however, it also increases the total amount of interest paid over the life of the loan quite significantly, and it increases the possibility that the final instalments may have to be met from post-retirement income,’ Woods said.

He told lenders they need to consider whether an individual has the ability to meet repayments from retirement income, or sell their house and downsize to pay off the loan.

‘If lenders become too narrowly pre-occupied with the profile of the loan in the first five years (in line with mortgage market review affordability rules), this could store up a problem for the future,’ he said.

Woods also said the PRA will crack down on lending practices which look to hide risks from balance sheets.

He highlighted concerns about lenders beginning to take more risks in order to compete with each other, the Guardian reports.

‘Across the wider market, we are observing – not from all firms, but definitely from a few– a shift in credit risk appetite as lenders compete with each other to find ways of widening the pool of available borrowers, increasing the size of loans available to them, or reducing the credit premium charged for inherently more risky loans,’ Woods said.

The speech, which was originally due to be delivered to the Building Societies Association, follows a PRA warning about risky consumer credit lending earlier this month.

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Written by: Houseladder