Historically, the typical default term for a first-time mortgage was 25 years.
However, with the advent of low interest rates and a more flexible attitude from mortgage providers, things are changing.
According to the Financial Conduct Authority, two thirds of first-time buyer mortgages have terms that go beyond 25 years. In 2006, it was just one third. This has led to the average mortgage term rising to 30 years, with some mortgage terms going beyond that and up to 40 years.
So, why would a first-time buyer sign up for a 30 or 40-year mortgage?
For most people, it’s to spread the cost.
If, rather than going for a 25-year term, you choose a 30-year mortgage then your monthly payments will be reduced, giving you more cash to spend on things that are important to you. If you’ve struggled to get enough capital together for a deposit, a longer mortgage term makes owning a house more affordable today.
For people who work in jobs that pay regular bonuses, many mortgages will allow you to overpay up to 10 percent of the capital every year in a lump sum. So, you could take a long-term mortgage with low repayments, then pay off chunks with your annual bonus, for example.
However, there are considerations when opting for a longer mortgage.
The first is that, though your monthly payments may be less, over time you will pay more. According to the Times:
“A first-time buyer would pay £867 a month if they took out a 25-year mortgage, based on the typical loan size and a 2.25 percent rate, while taking out a 35-year deal would cut the monthly repayment to £684 a month. But over the course of the 35-year deal they would pay £27,311 more in interest.
Another consideration is that even if you start paying a 35-year mortgage off when you’re 30, you will be near retirement age when you pay it off. This is, of course, something you need to make provisions for as you get older.
So, on the one hand, 35 and 40-year mortgages give you smaller monthly repayments while 25-year mortgages could mean your mortgage is paid off when you’re middle-aged. Ultimately, there’s no one-size-fits-all rule when it comes to mortgage length.
The best solution is to talk to an independent mortgage broker like Charles Cameron & Associates who’ll take your personal circumstances on board and help you make a decision that’s tailored to your needs and expectations.6t5