The Prudential Regulation Authority (PRA) has spoken out against increased length mortgages which could see more borrowers continuing to pay back loans after retirement.
The regulation authority set up by the Bank of England warned lenders about offering longer mortgage terms in a speech originally scheduled for May, but delayed due to the snap general election.
PRA chief executive Sam Woods remarked that the bank had noticed that mortgage terms were seen to be rising from the traditional 25 years to 35 years or even longer.
He went on to say: ‘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.’
The authority feels that mortgage lenders need to take into account whether an individual has the ability to meet repayments from retirement income, or sell their house and downsize to pay off the loan.
Mr Woods said: ‘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 also made it clear that the authority will be keeping a close eye on lenders looking to hide risks from their balance sheets.
He said: ‘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.?
The latest warning from the Prudential Regulation authority follows a similar one recently about risky consumer credit lending.