A standard mortgage used to last 25 years, but experts are reporting a growing trend for marathon loans extending up to 40 years, as first-time homebuyers and movers opt for lower monthly payments in an effort to close the gap between rising costs of living and still -high sales prices.
New figures show that the number of first-time homebuyers opting for a 35+ year mortgage term more than doubled during 2022 to 17%. The number of loans over 30 or 35 years also increased, from 34% to 38%, over the same period, according to banking group UK Finance.
This tactic could be one reason why this year’s big drop in house prices has failed to materialize, with many property market watchers surprised by its apparent resilience.
“Young people are in a really difficult position right now because the private rental market is absolutely terrible, with a lack of available housing and rents rising rapidly,” says Neal Hudson, housing analyst at research firm Residential. Analysts.
“Even though mortgages are more expensive now…it’s still more desirable to try to become a first-time buyer than to stay in the private rental market, if possible.”
The obvious advantage of a longer mortgage term is that it reduces monthly payments, and in fact, for some first-timers, it may be the only way they can afford to move up the property ladder given the pressure created by higher homeownership costs. life, with UK inflation still over 10%.
The idea of a schedule that could result in you still paying your mortgage when you’ve started collecting your pension is not new, since loan periods get longer as prices rise. In 2005, the average term for a first-time buyer was just 26 years, but at the end of last year it was just over 31 years.
The market has adjusted to this new reality, and today two-thirds (67%) of mortgages have a standard maximum term of up to 40 years, according to Moneyfacts, a financial data provider. That’s an increase from about half just four years ago.
Back-to-back interest rate increases mean those who move are also using longer terms to lower their monthly commitment. In fact, the number of movers who contracted terms of more than 35 years doubled to 8% in 2022, while for terms of 30 to 35 years, the figure increased from 21% to 26%. However, the age of the borrower is a factor, as many lenders require the mortgage to be paid off before age 75. They should also make sure that the mortgage remains affordable at all times, not just at the beginning.
After years of ultra-low rates, mortgages started to get more expensive last year as interest rates began to rise. The cost of new fixed-rate offerings rose after last fall’s disastrous mini-budget, but has since receded. However, at the time of writing, Moneyfacts’ “best buy” deals for first-time buyers have rates between 5% and 5.5%.
The longer terms are a direct consequence of the affordability challenge that high home prices impose on buyers, says David Hollingworth, an associate principal at brokerage firm L&C Mortgages.
“It’s not healthy for borrowers to have to take out longer and longer mortgages to try to pay off a house. Ideally, the shorter the term, the better, but buyers are looking for practical solutions to better manage their budget, and this can help.”
While extending the term of a home loan can give a buyer “breathing room,” the other side of the coin is that you end up paying much more in interest because you reduce the mortgage balance more slowly, he explains.
Based on a £150,000 repayment mortgage at 4%, Hollingworth claims that over a 25-year period, monthly payments would be £792 and the total interest bill would be £87,528 (see example). Change that to 35 years and the payments drop to £664, but the interest bill shoots up to nearly £129,000.
Go to 40 years and the monthly outlay drops back to £627, but the interest on the loan is a whopping £150,917.
If things go well, borrowers can make overpayments or reduce the term of the mortgage when they remortgage, Hollingworth says. And unlike, say, an interest-only mortgage, you will eventually own a property. “It costs more in the long run, but at least it will lower the principal balance and you will have paid it off at the end, even if it is 40 years later.”
Term Monthly payment full interest
25 £791.76 £87,528
30 £716.12 £107,803
35 £664.16 £128,947
40 £626.91 £150,917
Source: L&C Mortgages www.landc.co.uk
Based on a £150,000 repayment mortgage at a rate of 4%