For decades, a 25-year term has been arguably the default starting point for all mortgages. Millions of borrowers have taken their home loan over this period, but now many experts see a 25-year mortgage as a thing of the past.
As more and more people decide to take their mortgage over 35 or even 40 years, we look at the latest figures, why borrowers are choosing a so-called ‘marathon’ mortgage and what you need to consider if you’re thinking about committing to a 40-year home loan.
Half of mortgage products let you borrow up to 40 years
New research has revealed that more than half of all residential mortgage products now have a standard maximum mortgage term of 40 years.
Data published in FT Adviser shows that borrowers can now sign up to 2,744 mortgage products that last for 40 years, equivalent to 55% of the whole residential mortgage market.
Just five years ago, only two-fifths of products on the market allowed a borrower to sign up to a 40-year deal.
The research is backed up by official data from the Financial Conduct Authority that reveals the number of borrowers taking out so-called ‘marathon’ mortgages lasting 35 years or more has reached its highest level since the 2011 recession.
The figures show that 28,310 mortgages running for 35 years or more were approved in 2017, the most recent year for which the data is available — equivalent to a 27% rise on the previous year.
The FCA said 2.5% of mortgage approvals in 2017 were for ‘marathon’ deals, compared with 1.6% in 2011.
Darren Cook, finance expert at Moneyfacts, said: “In the past, a standard term of a mortgage generally amounted to a period of 25 years, but most products are now available for a period of 40 years.
“By extending their mortgage term, borrowers can reduce their monthly repayments and therefore are more likely to meet strict affordability requirements.”
Who can get a ‘marathon’ mortgage?
While more than half the mortgage products in the UK can now be taken over a 40-year term, the reality is that many people will not be able to borrow over this period.
Most lenders have a maximum age cap, and this is typically between the age of 70 and 80. What this means is that anyone taking out a mortgage over the age of 35 is likely to be restricted by a lender’s maximum age limit.
Considering that Which? report that the average age of a first-time buyer in England is 32.6 years old (34.5 in London) it’s apparent that many people won’t be able to take advantage of a 40-year term.
Additionally, lenders may ask you for your ‘anticipated retirement age’ when you take out your mortgage. Some lenders may restrict your mortgage term based on the nature of your job and retirement age – for example, a manual worker is unlikely to be accepted up to the age of 75 whereas a later working age may be acceptable for some types of career.
Why are more people taking 35- or 40-year mortgages?
After stricter mortgage affordability rules came into effect in 2014, it became tougher for many borrowers to prove that they could afford the mortgage they wanted.
As a result, many lenders have allowed borrowers to extend the term of their mortgage as this reduces the initial monthly repayment.
Here’s an example. If you are a first-time buyer with a mortgage of £150,000 at an interest rate of 2.5%, your monthly repayments would be:
- £673 over 25 years
- £593 over 30 years
- £536 over 35 years
- £495 over 40 years
So, extending the term of your mortgage may result in a big enough saving to make the difference between passing or failing the affordability assessment.
Mortgage expert David Hollingworth says that there is no doubt that more mortgages were being taken out over longer terms.
He says: “This is particularly true of first-time buyers as they look to keep their monthly payments lower to give some breathing space in their monthly budgeting and help deal with affordability issues.
“As a result, more lenders have edged up their maximum term to keep in line with the competition and that inevitably drives up the number of products that are now available at longer maximum terms.”
While choosing a longer term for your mortgage may help you to get the borrowing you need and bring your repayments down to an affordable level, there are some factors you should consider.
The downsides of a ‘marathon’ mortgage
While a ‘marathon’ mortgage might reduce your initial monthly repayments, taking out a home loan over 35 or 40 years could see you pay significantly more overall.
Here’s an example from FT Adviser.
A £200,000 repayment mortgage at a rate of 2.5% over 25 years equates to a monthly repayment of £897.23. Your total interest payable would be £69,169 over the term.
The same mortgage taken over a 40-year term would reduce the monthly repayments to £659.56 but increase the total interest to be paid to £116,588. You’d pay an additional £47,419 in interest.
If you choose to take your mortgage over a ‘marathon’ term you may need to be disciplined in the future to avoid paying thousands of pounds in additional interest.
If your financial situation improves in the future, you could:
- Ask your current lender to reduce your term and increase your repayments
- Remortgage to another lender and shorten the term
- Make overpayments to your mortgage
- Consider an offset mortgage and offset some of your savings against your borrowing
- Pay off lump sums to your mortgage on an ad hoc basis
If you want advice on the right mortgage term for you, or you are considering increasing or reducing your mortgage term, get in touch. We can help you find the right lender and the most appropriate deal for you. Email firstname.lastname@example.org or call (0207) 808 4120 to find out more.