Are the days of the standard 25-year mortgage term behind us? For decades, 25 years was the go-to length when arranging a new mortgage, but now increasing numbers of borrowers are taking their home loans over 35 or even 40 years.
While this can help borrowers onto the property ladder, it means that many people will still be paying their mortgage well into their 70s or 80s. We look at why these types of mortgage are becoming more popular, and the pros and cons of taking one.
New figures show 40-year mortgages ‘becoming the norm’
New data revealed by financial analysts Moneyfacts has revealed that mortgages with a maximum term of 40 years are now ‘becoming the norm’.
With Yorkshire Building Society becoming the latest lender to increase its maximum term to 40 years, 57% of all the residential mortgage deals currently available in the market can be taken on a mortgage with a term of up to 40 years. This is up from just under 36% in March 2014.
In 2005, just 2.5% of new mortgages were for 35 years or more, according to the Bank of England. By 2017, it said that had risen to 15.75%. And now, numbers published this year by the Financial Conduct Authority show the overall number of mortgage sales above 25 years is now at 41%, rising to 66% for first-time buyers.
Why are 40-year mortgages becoming more popular?
One of the main reasons that 40-year mortgages are becoming more popular is that they help borrowers to reduce their monthly repayments, and to pass strict affordability tests.
Taking a mortgage over 40 years rather than 25 years has the effect of reducing the monthly repayments. While this helps first-time buyers to keep their payments at a manageable level, it also helps them to get the size of mortgage they need as they are more likely to satisfy a lender’s underwriting requirements.
Another reason for the rise in popularity has been highlighted in research by the Yorkshire Building Society. The mutual has found that an increasing number of borrowers are setting their sights on larger, detached homes, while more traditional starter homes of the past are being overlooked.
As a result, the proportion of 30 to 35-year mortgage terms taken out by first-time buyers has grown from 16% in 2007 to 36% today, while the proportion of mortgages lasting between 20 and 25 years has dropped from nearly half of all deals taken to just one in five.
Charles Mungroo, Senior Mortgage Manager at Yorkshire Building Society, says: “Along with more purchases being made later in life and families having to juggle multiple financial commitments, there is a real demand in borrowers wanting to stretch their terms to make their monthly payments more affordable along with borrowing later in life.”
You will reduce your monthly repayments…
Taking your capital and interest mortgage over a longer term will have the effect of reducing your repayments.
Moneyfacts cites the example of a £250,000 repayment home loan with an interest rate of 2.5%.
Over 25 years, that equates to a monthly repayment of £1,121.
The same mortgage taken over 40 years would cut the monthly repayments to £824, reducing the monthly commitment by a massive £297.
For many first-time buyers, this will be the difference between them being able to afford the mortgage and to satisfy their lender’s affordability requirements.
…but pay a lot more interest overall
While taking a 40-year mortgage has the effect of substantially reducing your mortgage repayments, it means you will end up paying a lot more interest overall.
Let’s use the example above of a £250,000 mortgage with an interest rate of 2.5%.
Over 25 years, on a monthly repayment of £1,121, the total interest payable would be £86,463.
The same mortgage taken over 40 years would cut the monthly repayments to £824 but the total interest would be £145,733. You would pay an additional £59,270 in interest over the mortgage term.
…and you could be paying your mortgage into your 70s and 80s
Research has found that the average age of a first-time buyer in the UK has now reached 32. So, if more and more homebuyers are taking out a 40-year loan, it raises the prospect that a generation of buyers will be paying their mortgage into their 70s or beyond.
Moneyfacts’s Darren Cook says: “The longer a borrower extends their mortgage term, the older they will be when they have finally repaid their mortgage.
“An extended mortgage term may go beyond pension age, so it is imperative that these borrowers consider their options and attempt to make provisions if their personal circumstances change.”
One way to ensure your mortgage is repaid before you reach retirement age is to review it every time you move home or your deal comes to an end.
When you move or remortgage, you will undergo a new affordability assessment with a lender. If your income has risen, or the cost of borrowing has fallen, you may be able to take your mortgage over a shorter term at that point, while still meeting a lender’s affordability guidelines.
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