The number of borrowers taking out mortgages lasting 35 years or longer has rocketed in the past 12 months, with uptake more than doubling, according to mortgage lenders’ trade body UK Finance.
And one property industry figure says the ongoing lettings supply shortage, pushing up rents, is making long term mortgages more acceptable.
An analysis of the UK Finance figures – conducted by consumer group Which? – shows that the average first-time buyer, aged 31, would still be paying off their home loan as they approach retirement age if they opted for a 40 year product. It’s believed around one-in-five FTBs choose this longest possible repayment option.
The proportion of FTBs taking out a loan for 30 to 35 years has also grown, with the share increasing from 34 to 38 per cent.
Which? says that historically most mortgages had terms of around 25 years, but now a typical £180,000 repayment mortgage with an interest rate of 4.0 per cent would, over a 40 year term, mean that the interest bill would surpass the original loan sum of £180,000:
The consumer body says that, self evidently, borrowers are increasingly spreading their mortgages over a longer period to make things more affordable in the short term. And getting a long-term mortgage may make the difference between buying or remaining in the rental sector.
This is despite the obvious disadvantages of such products – higher interest payments over the duration of the term, and the possibility that part of the loan may still remain unpaid even when the borrower has stopped work and is retired.
At least one property industry figure believes that, notwithstanding the disadvantages, 40 year mortgages are here to stay.
Jonathan Rolande of the National Association of Property Buyers says: “More and more people are opting for these marathon mortgages so I expect them to become a mainstay in the market in the years ahead. At the moment, house hunters are in a really tough position, especially young first time buyers. A 40 year deal, for many, is the only option to allow them to get a foot on the ladder.”
“Although long term loans will prop up the market in this downturn and fuel growth to help it bounce back, there is a downside. In short, the more banks lend, the more people will pay. Most buyers purchase at the maximum amount they can borrow.
“Many buyers would rather buy than take their chances on the private rental market with the insecurity and ever-upward rent rises that it brings with it. This extra borrowing capacity could fuel another round of price rises in the future”
He says that buyers in their late 20’s and 30’s are likely to inherit from home-owning parents before the mortgage is finished, allowing them to pay off the capital. Products with longer, cheaper monthly payments that offer flexible repayments are popular – not least among the many people with variable income due to the gig economy.
“Overpayments can be made in better times, reducing the term. Nobody can say for sure if they are a good or bad thing as so much depends on the borrower’s personal circumstances. But there is no reason why 25 years should have to be the default term for everyone.”
