Long-term mortgages

The cost of living is rising, and many homeowners and aspiring buyers are feeling the pinch. An increasing number are extending their mortgage terms to 35 or even 40 years to keep their monthly repayments manageable.

Over the past year, there has been a 10% surge in applicants choosing a 40-year mortgage term, and 38% of all applicants now favour terms of 30-35 years.[1] This shift towards longer mortgages comes as no surprise. With property prices skyrocketing faster than salaries, shorter mortgage terms have become a luxury many first-time buyers cannot afford. In fact, up to 67% of all available mortgages now allow terms of up to 40 years.

LENDER’S AFFORDABILITY CRITERIA

Despite the higher interest payments associated with longer terms, there are situations where a longer-term mortgage can be beneficial. For starters, lower monthly repayments increase your chances of meeting your lender’s affordability criteria. This could also enable you to borrow more, which means you wouldn’t need to save as large a deposit to secure your dream home. If you’re anticipating a future inheritance, a longer-term mortgage allows you to maintain lower monthly repayments now and pay off the balance later in a lump sum. Similarly, if you expect significant career progression and increased earnings, a longer-term mortgage can ease the initial stages of homeownership. You can then shorten the term once your income increases.

MORE DISPOSABLE INCOME

Additionally, a longer-term mortgage might align better with your lifestyle choices. Keeping your repayments low gives you more disposable income to enjoy leisure time. According to the Office of National Statistics (ONS), earnings have doubled since 1997, but house prices have soared four-and-a-half times. For instance, a first-time buyer earning £36,000 wanting to purchase a £288,000 home would need to borrow eight times their annual income.

IMPROVE YOUR LIFESTYLE

However, most lenders only lend up to 4.5 times your annual income, leaving a substantial shortfall. Therefore, first-time borrowers often require a large deposit or a very long repayment period to meet the lender’s affordability criteria. Suppose you take out a 6% mortgage on a £250,000 property over 40 years. Over the duration of the loan, you could end up paying a staggering £206,000 in interest alone.

Now, compare this to the same mortgage paid over 25 years. Despite the higher monthly repayments, the total interest paid would be around £80,000 less than on a 40-year term. That’s a substantial saving which could be invested elsewhere or used to improve your lifestyle.

LONG-TERM IMPLICATIONS

While a longer-term mortgage may seem appealing due to its lower monthly repayments, it’s essential to factor in the increased overall cost. Shorter-term mortgages may require higher monthly payments, but the often result in less interest paid over the life of the loan.

In the face of rising property prices, longer-term mortgages may seem like the only option for many. However, it’s worth considering all possibilities and seeking professional mortgage advice before making a significant financial commitment. After all, a mortgage is likely the most significant debt you will ever take on, and understanding the long-term implications is crucial to making an informed decision.

Don’t forget, our professional friendly advisors are on hand to support you and can help you explore all of your options.

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