Are 35 year mortgage terms storing up problems for the future?

One in five first-time buyers taking out mortgages lasting over 35 years

A record 19 per cent of first-time buyers took out mortgages lasting at least 35 years in March, according to lenders’ trade body UK Finance.

Mortgage broker John Charcol says this is just the latest example of a trend in which mortgage terms have been increasing. 

A statement from the broker says: “There has been a correlation between property price and the length of the average mortgage terms increasing. 

“Historically terms of 25 years would have been many applicants’ defaults option, but there has been a steady increase over the last few years with FTBs choosing to take the mortgage over 35 and 40 years.

“Since the pandemic property prices have increased beyond expectations – partially fuelled by pent up demand and low rates – As a result client are having to stretch their budgets to get on the property ladder, the most common approach is by extending the term as thing bring down your monthly repayments.”

The broker says first time buyers are not the only applicants to have chosen to extend their terms.

“We have seen homeowners coming to the end of their fixed deal looked to extend also in light of increased mortgage rates and households’ expenditure such as utility and energy costs, look to extend to help soften their monthly outgoing.

“Lenders attitudes have also changed, more lenders now accept applicants below a certain age to lender beyond state age, stating the mortgage must end by the age of 75.”

But John Charcol is explicit about the risks when choosing a mortgage over a longer period.

“Firstly, by increasing the term of your mortgage, you can lower your monthly payments and reduce your monthly outgoings. However, doing this also means there will be an increase in the overall cost of borrowing as you’ll be paying interest on a more slowly reducing mortgage amount for a longer period of time.

“Lower monthly repayments might be useful as a short-term cost-cutting solution, but you want to ensure that you review the term each time your fixed rate comes to an end when remortgaging or reviewing your options when home moving.

“First time buyers do have the benefit of time, with earnings expected to increase during the mortgage term its important to continually review to ensure your circumstances and make the right decision which could save thousands in the long term.

“Homeowners with a longer term should also consider to overpayments. Each year fixed rate products typically allow you to make overpayments of up to 10% of the outstanding balance so you can pay off your mortgage quicker.”

The broker warns that another concern for extend terms are FTBs preparing inadequately for retirement.

The firm says: “We should be aiming for at least 15 per cent to be paid into our pensions each month to ensure a comfortable retirement. By extending the term and putting more income aside to pay your mortgage, or extend the term beyond state age will mean when it comes to retirement pension pots wouldn’t have had the time to increase.”

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