Goodbye 25-year mortgages, but are we walking into a borrowing trap?

When you go long, your monthly outlay might be lower, but by the end of the term you will have paid out far more.

One in six borrowers is taking out a mortgage lasting 35 years or more, official figures show – meaning many will still be paying off their loans well into their 70s.

The data prompted one leading broker to declare that the traditional 25-year mortgage is “a thing of the past”, particularly when it comes to first-time buyers. But what are the pros and cons of opting to “go long”? Is it wise to saddle yourself with a major debt that you might still be paying off long after you have started collecting your pension?

The Bank of England has disclosed that during the first three months of this year, 15.75% of all new mortgages taken out were for terms of 35 years or more. While this is down slightly on the high of 16.36% recorded at the end of 2016, the trend in recent years has been relentlessly upwards – in mid-2005 it was just 2.7%. Similarly, the proportion of new mortgages lasting for between 30 and 35 years has also surged, from less than 8% in 2005 to just shy of 20% now.

It comes amid fresh warnings from the Bank of England this week about the dangers of reckless lending and surging consumer debt.

With high house prices, escalating student debts and a rise in the age at which couples have children, many people are tending to buy a home later and opting for a longer repayment term. And the big plus point of this is lower bills: stretching the term reduces the monthly payments, which can seem very attractive. For example, Halifax says someone who takes out one of its mortgages to buy a £200,000 house could expect to pay from £809 a month if they go for a 25-year term. But that falls to a much more affordable £596 a month if they agree to sign up to a 40-year term. This is based on a first-time buyer taking out a £180,000 mortgage (ie, putting down a 10% deposit).

But there’s a sizeable catch. When you go long on your mortgage your monthly outlay might be lower, but by the time you get to the end of the term you will have paid out far more – probably tens of thousands more – than if you had opted for the standard 25 years. As the table shows, you would pay almost £33,000 more interest – ie, £81,643 instead of £48,882 – if you went for a 40-year term rather than 25, based on a £180,000 repayment mortgage at 2%.

David Hollingworth at mortgage broker London & Country says many lenders will let people take out a 35-year mortgage, and a fair few – including the Halifax, Nationwide and the Newcastle, Leeds and Hanley Economic building societies – will go up to 40.

Mortgage table
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At the same time, some lenders have extended their maximum age for a borrower at the end of the term, making it easier for many people to stretch their loan. The Halifax’s maximum age is 80, for example, while the Family building society will let a 42-year-old take out a 40-year mortgage, or a 53-year-old take out a 30-year one.

Hollingworth says someone might go for a longer term because they like the idea of having a bit more slack in their monthly budget, but adds: “It’s probably wise for people to keep it under review.” After a couple of years you may want to consider shortening the mortgage term if your finances will allow it. Alternatively, a borrower in this situation could consider making overpayments to reduce what they owe. Most deals will allow some form of penalty-free overpayment.

Another reason why longer-term deals have taken off is because of the tightening of the rules around interest-only deals, which are much harder for first-time buyers to access, says Hollingworth. He adds that, overall, this is probably a good thing as it is better to do a 35-year repayment mortgage than interest-only with no repayment vehicle in place. With the former, “even if you never pull the term back down you are at least paying off the mortgage,” says Hollingworth.

Jonathan Harris at mortgage broker Anderson Harris says: “The typical 25-year mortgage term is a thing of the past, particularly when it comes to first-time buyers, owing to tougher affordability criteria. However, most lenders still require mortgages to be paid off by retirement, which does put a limit on the length of the term.”

He says most lenders will allow 35 years. “We very rarely do a 25-year mortgage, with most clients opting for longer terms – and we would advise them to do so. Most products come with an overpayment facility of 10% per annum, so it may be sensible to take the longer term and then use the overpayment to reduce the loan faster. This way they are not contractually obligated to meet the payment schedule of a 25-year term.”

While taking out a longer-term mortgage might be the only way you can afford to get on to the property ladder, it’s worth considering whether this is the best option. David Blake at Which? Mortgage Advisers said this week that deciding the length of your mortgage term is a case of “balancing speed of repayment with affordability of repayment”.

source:-theguardian