Nearly one in five first-time buyers are taking out 40-year fixed-rate mortgages in a bid to lower monthly repayments.
The proportion of first-time buyers opting for a mortgage term longer than 35 years more than doubled last year to 17 per cent, according to UK Finance, the trade body for the banking industry. It added the number taking out a loan over 30 to 35 years also increased from 34 to 38 per cent during the same period.
Longer-term mortgages are the only way some can afford to get on the property ladder as the longer the deal, the lower the monthly payments. However, this does mean the amount of interest homeowners will pay will rise significantly.
Mark Harris, chief executive of mortgage broker SPF Private Clients, said: “Long gone are the days when a 25-year mortgage term was the standard. Increasingly, we are seeing buyers opting for longer terms to make them more affordable, but perhaps not in the long term.”
It comes as rising interest rates are leading to higher mortgage rates, while double-digit inflation is making it harder for people to pass affordability calculations, lowering how much they can borrow. If your bills are higher than you will be allowed to borrow less by your lender.
Higher property prices have also contributed to those taking out longer terms with the average house costing £287,880 in March, up from £285,660 in February.
Nicholas Mendes, mortgage expert at brokers John Charcol, said: “There has been a correlation between property price and the length of the average mortgage terms increasing.
“Since the pandemic property prices have increased beyond expectations – partially fuelled by pent up demand and low rates – and as a result clients 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.”
It is not just first-time buyers who have chosen to extend their terms, with homeowners coming to the end of their fixed deal also fixing for longer.
Many will be looking to move homes within a four-decade period and most loans can be ported, meaning your existing mortgage can be transferred to your new home. This avoids any early repayment charges – and if your new home is worth more money you can take out a second mortgage to top it up.
These mortgages can also be reviewed as their income and circumstances change – so if you divorce or a partner loses a job, it’s worth checking that the lender will be flexible.
But even if your mortgage is portable, you still may not be able to take it with you as you’ll have to reapply for the mortgage with the lender and may not qualify if your circumstances and/or the criteria have changed, or the property you’re looking to buy is deemed unsuitable security by your current lender.
The early repayment charges are usually between 1 and 5 per cent of the money you still owe.
The risks of a 40-year term mortgage
While a 40-year-old mortgage has the advantage of giving people lower monthly repayments, there are downsides, which is why it has previously not been a popular option.
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.
Experts advise it is important to try and overpay where you can to cut down how much interest you are paying. You can typically do this by increasing your monthly direct debit or make lump sum payments. Most lenders allow you to overpay by 10 per cent of the loan amount a year.
Harris added: “We are finding that first-time buyers in particular are opting for longer terms and then planning to overpay on the mortgage as, and when, they can. This will enable them to keep the monthly payments relatively low but with the plan of paying off the mortgage ahead of the end of the term, thereby reducing the interest paid.”
There used to be the risk that you end up saddled with a monthly outgoing in retirement that you can’t afford. However, with many people working beyond “normal” retirement age, and lenders introducing a range of flexible products to older borrowers, this is less of an issue than it might have been in the past.
Harris said: “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.”
Importantly, homeowners should seek advice from a market broker before taking the plunge.
