Average ‘new’ borrower will pay off mortgage after age 65

Monday, 22 July 2024

The average age at which people taking out new home loans are scheduled to pay them off has passed 65, data from Centrix shows.

The milestone was passed last year, and the pattern continues, with the average age at which a new mortgage borrower in 2024 will finish repaying their loan having reached 65.8 years.

At the most extreme end of the mortgage spectrum are people taking out “new” home loans after the age of 50, Centrix data shows.

For those people, the average age at which they are scheduled to make their last repayment is just over 76 years.

But mortgage advisers say the data hides a much more nuanced and complicated picture with some people going mortgage-free far earlier than the original term of their loan, and some taking longer.

John Bolton, founder of Squirrel Mortgages, said he had just arranged a loan for a client who on paper would finish paying it off at 85.

It was a loan that was set up to be repaid over 30 years, he said.

Centrix data shows on paper at least, 31% of people aged 50 or over who took out new mortgages had their last repayment scheduled after their 80th birthdays, up from 16% in 2018.

However, when the man turned 65, he was projected to have $800,000 in his KiwiSaver, and would use half of it to repay what was left of his mortgage, Bolton said.

Mortgage adviser Karen Tatterson from Loan Market said banks treated loans on which the last repayment date came after the borrower turned 70 differently.

That was the de facto age at which banks assumed people would leave the labour market, though OECD data shows in 2022, the average age at which New Zealanders stopped paid work was 67.3 for men, and 65.5 for women.

“They want to see an exit strategy,” she said.

That could involve cashing up KiwiSaver, or it could mean selling the home when they retire and moving somewhere cheaper.

Two decades ago, when house prices were much lower, the normal repayment term for a mortgage was 25 years.

Centrix data shows that now more than 40% of “new” home loans are for terms of 30 years.

However, that data also hides a more nuanced story because “new” means both genuinely new mortgages, and also people taking out a loan with a new bank in order to refinance an existing mortgage.

Tatterson said people needed to take care when refinancing loans, as often bank systems would automatically set the term of the new loan at 30 years.

That could mean in some cases people unwittingly extending their real mortgage repayment term out past 30 years.

Good mortgage advisers would make sure that borrowers avoided that pitfall, which could result in them paying a lot more interest, Tatterson said.

“I would never let them do that,” she said.

Bolton said bank loan affordability calculations were quite conservative, and assumed people had lower disposable income than they really had, which often forced people to take 30-year loans, when they would prefer 25-year loans.

He said one current client, who was quite well off, was shown under bank affordability testing not to have a high enough income to afford a 25-year loan term.

“We will put it on a 30-year term, but we will set the repayments on a 25-year term,” Bolton said.

There are a large, though uncounted, number of people who choose to repay their mortgages faster than the 30-year terms banks offer as standard.

Bolton believed they were in the minority of people with home loans.

“Most people default to what the bank says,” he said.

A chance encounter a loan reduction adviser in a mall in Christchurch led couple David and Lorraine Rua to prioritise early repayment of their home loan.

They had been forced to take out a home loan of $495,000 to buy a section and build a home after their first home was red-zoned after the Canterbury Earthquakes.

Until the day of the chance meeting, Lorraine said: “I had always done it the bank way.”

The couple worked with Emm McCartney from NZ Home Loans to restructure their loan, set a careful budget, and set an ambitious repayment schedule, making their final repayment in 2022.

They did get a one-off boost, when they got a compensation payment from insurer Southern Response having initially been short-changed on the settlement of their claim.

Rua, a registered nurse who still works at age 70, recalled the sense of freedom that came from no longer having to pay the bank.

“It was an incredible feeling,” she said.

McCartney said her clients commonly came through her doors with a target age at which they wanted to be debt free.

“Younger people are wanting to be debt free in their early 50s,” she said.

Their motivations included to attain freedom and security, while leaving them enough time before retirement to amass retirement savings.

McCartney said many people with mortgages appeared set to find themselves still in debt, even after they retired.

McCartney has been running her NZ Home Loan franchise for 20 years, and says tough economic times increase the number of people seeking out mortgage reduction strategies.

“The global financial Crisis (GFC) was a prime example. I had my best year in that period of time,” she said.

The GFC was a financial crisis in 2007 and 2008 sparked by excessive and risky lending in the United States. In New Zealand, it led to a spike in unemployment lasting for several years, and a temporary fall in house prices.

Hannah McQueen, founder of the enable.me financial coaching company, says tough times give people “permission” to admit they are not doing well with money.

There was an advice gap on repaying mortgages, she said, and many middle-income families did not understand they could make faster progress on their home loans by being more efficient and careful with their money.

“Their collective inefficiencies will normally take 10 years off their mortgage, if they can capture them,” McQueen said.

High house prices relative to wages meant young people had to make “bold choices” earlier than their parents had had to to build wealth to see them end up having a comfortable retirement.

Perhaps in the next 20 years, New Zealanders would increasingly live in smaller homes, and apartments, more like Europeans, McQueen said, but that would take time to happen.

And perhaps the age of retirement would get pushed out past the age of 65, she said.