- Six out of 10 FTB mortgages now on deals over 25 years
- Major lender says 4,000 of its mortgages in 2015 were over 40 years
- A £150k mortgage over 40 years rather than 25 will cost £63k more
First-time buyers are signing up to mortgages with longer terms than ever before to contend with rising house prices, new figures show.
While just a 10 years ago less than a third 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 increasing to 40-year terms to make monthly payments more affordable on increasingly expensive properties. This may deliver lower monthly payments but the cost over the lifetime of the mortgage is huge. In general terms, a £150,000 mortgage over 40 years rather than 25 years will end up costing more than £63,000 in additional interest.
Many first-time buyers are stretching repayment terms in order to get into the market
Longer-term deals also mean many will still be paying off their mortgage into their retirement – or will have to delay retirement until they have finished paying off the debt. This pressures borrowers at both ends who are unable to get on the housing ladder until an older age than previous generations.
Increased mortgage terms also leave borrowers paying significantly 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.
Increase to a 40-year mortgage and the total cost becomes £300,916 – meaning borrowers fork out an extra £63,398 to the bank or building society.
Long-life mortgages are becoming more common and their lower monthly payments allow lenders and brokers to fit buyers to affordability-based lending models that assess them on monthly incomings and expenditure.
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 increased 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 the last few years.
This new norm, the CML suggests, is mainly to do with buyers stretching incomes to get onto the property 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.’
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.
If you are looking to purchase a property, speak to Frost Financial today and let one of our friendly advisers find the best mortgage deal for you.