Longer Term Means Higher Overall Interest Cost
One in five first-time buyers – a record number – are signing-up to 35-year mortgages to make their monthly repayments affordable, according to industry data, writes Jo Thornhill.
The figures from banking industry body UK Finance show that 19% of all mortgage loans taken out by first-time buyers in March were for terms of more than 35 years. This compares to 9% in December 2021, before the Bank of England started to increase interest rates, and around 5% a decade ago in 2013.
The UK Finance statistics, which will be published as part of its wider Household Finance Review on Wednesday this week, also reveal around one third of first-time buyers (36%) are taking out mortgages for between 30 and 35 years, rather than the traditional 25 years.
The popularity of longer mortgage terms, which have lower monthly payments, has increased in recent years as property prices have risen. But with mortgage rates climbing rapidly over the past 18 months, taking out a mortgage over 35 and even 40 years has become the only way to make buying a home affordable for many buyers.
Increasing the term or length of a mortgage reduces the monthly repayment amount, but it means borrowers pay more in interest over the life of the loan.
For example, a first-time buyer taking out a £300,000 repayment mortgage over 25 years at an interest rate of 5% would pay back £226,321 in interest over the term (this is assuming the interest rate stays the same for the duration, which in reality is unlikely).
But if the same borrower took the loan over 35 years they would pay back £336,198 in interest – £100,000 more.
Most mainstream lenders will structure a mortgage over 35 or 40 years, depending on affordability and eligibility, and also the age of the borrower.
Nick Mendes, technical mortgage manager at online broker John Charcol, said: ”Since the pandemic property prices have increased beyond expectations and clients are stretching their budgets to get on the property ladder. The most common approach is by extending the loan term as this brings down the monthly repayments.
“But first-time buyers are not the only ones extending their mortgage term. We’ve seen more homeowners coming to the end of fixed-rate deals and looking to extend the loan term to make it more affordable, in light of increased mortgage rates and other general increased household costs, such as energy and food.”
UK Finance figures show that, among home movers, 8% opted for a mortgage term of more than 35 years in March 2023. This is double the number who did the same in December 2021 (4%).
Mr Mendes adds: “Extending a mortgage term will have implications for a household’s overall finances and it’s important to understand the risks. Overpaying on a mortgage, when it is possible, is one way to try to reduce the debt more quickly.”
Lenders are continuing to pull their mortgage deals from the market while others launch new products with higher rates, as uncertainty continues around what will happen to interest rates for the rest of the year.
Source: www.forbes.com
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