Rise of the 40 YEAR mortgage: First-time buyers' ever-longer terms to afford high house prices (but it could cost £60k more)
05-07-2016
- Six in 10 first-time buyer mortgages now on deals longer than 25 years
- Comes in the wake of higher house prices and tighter affordability
- Halifax says 4,000 of its mortgages last year were over 40 years
- A £150,000 mortgage over 40 years rather than 25 costs £63k extra
By Lee Boyce for Thisismoney.co.uk
First-time buyers are taking out mortgages with longer terms than ever before to be able to contend with rising house prices, new figures show.
While just a decade ago just 30 per cent of mortgages lasted beyond 25 years, as many as 60 per cent of buyers today are taking one out for at least this long, according to the Council for Mortgage Lenders.
Some struggling buyers are even stretching to 40-year terms to make monthly payments affordable on increasingly expensive properties. This may deliver lower monthly payments but the cost over the long-term is huge. All else being equal, a £150,000 mortgage over 40 years rather than 25 years will end up costing more than £63,000 in extra interest.
Buyer headache: Many first-time buyers are stretching repayment terms in order to get onto the ladder
Longer-term deals also mean many will still be paying off their mortgage into retirement - or will have to delay retirement until they have finished paying off the debt. This squeezes borrowers at both ends who are unable to get on the housing ladder until later in life than previous generations
Longer mortgage terms also leave borrowers paying considerably more in interest payments over the years. A 30-year £150,000 repayment mortgage saves £76 on monthly payments but adds almost £20,300 to the lifetime cost of the loan, taking it from £237,527 to £257,804.
Stretch to a 40-year mortgage and the total cost becomes £300,916 - leaving borrowers forking out an extra £63,398 to the bank or building society.
Long-life mortgages are becoming common place and their lower monthly payments allow lenders and brokers to fit borrowers to affordability-based lending models that assess them on monthly incomings and outgoings.
High street lending giants Halifax and Nationwide Building Society offer longer term deals up to 40 years.
According to Halifax – one of Britain's biggest mortgage lenders – 4,000, or two per cent of its customers - in the last 12 months have taken out a 40 year mortgage, a figure that has crept up in recent years.
Before the financial crisis in 2007, nearly half of first-time buyers took out mortgage with a 25 year mortgage term - or even shorter, its data also shows.
However, last year, this had slipped to 30 per cent. More than one in four have a 35 year mortgage term, compared to 16 per cent nine years ago.
According to the CML, the median term for first-time buyers has lengthened from 25 years to 30 years within just a few years.
This new norm, the CML suggests, is mainly to do with buyers stretching incomes to get onto the housing ladder.
It says mounting affordability pressures, as house prices outpace earnings growth across much of the UK, provide the most plausible explanation for the change of direction.
It adds: 'Although the use of longer terms varies greatly across different types of borrower, reflecting their respective age profiles, the underlying trend is clear.'
Creeping higher: The number taking out mortgages over a term longer than 25 years has grown substantially
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Creeping higher: The number taking out mortgages over a term longer than 25 years has grown substantially
The latest house price index from Nationwide Building Society showed property prices rose 5.7 per cent compared to March 2015, the fastest pace of growth for 13 months.
It means the value of the average home has topped £200,000 for the first time, having risen from £196,930 just one month before.
In the wake of these rising house prices, Halifax says one in three young people don't expect to pay off their mortgage until after their 60th birthday.
NUMBER CRUNCHING: HOW TERMS COMPARE
On a £150,000 mortgage, over 25 years, the monthly payment would be £792, paying back £237,527 in total.
Over 30 years the monthly repayments become a lower £716, but the total rises to £257,804 over the term.
Over 35 years it is £664 and £278,948.
Over 40 years it is £627 per month, with £300,916 being repaid.
Figures based on a constant mortgage rate of 4 per cent. Use our mortgage calculator to do the maths.
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More than one in 20 expect to be paying their mortgage over the age of 70, while almost one in 10 expect to be paying their mortgage throughout their life.
David Hollingworth, broker at London and Country Mortgages, says: 'Longer mortgage terms are more likely to be used by first-time buyers and more are going beyond the traditional standard of 25 years in an effort to keep the monthly payment down in the early years.
'Having some breathing space in the monthly budget will appeal and tighter affordability requirements from mortgage lenders will also no doubt have played a role.
'Although monthly payments are lower, a longer term will result in a much bigger interest bill over the life of the mortgage and therefore it makes sense for borrowers to cut the term back as far as they can and to keep it under review over time.
'However, in the last peak some first-time buyers were using interest only without a repayment vehicle to keep payments lower.
'At least a borrower with a longer term will still be making inroads into the mortgage and they can trim it back as their situation alters.
'Some lenders including Nationwide and Halifax can offer terms for as long as 40 years although we see more borrowers opting to keep it less than that.'