The UK is a nation of aspiring homeowners. While the proportion of home ownership recently hit a 30 year low and the rental sector doubled in size, many of us would still much rather own than rent. And the fact that rental costs are higher than they have ever been before may well have something to do with it. Given the desire that Brits have to become a homeowner, many are willing to do whatever it takes to get onto the housing ladder, including taking on a mortgage well above the average term. But is getting a mortgage for longer than 25 years really a good idea?
The longer mortgage term
The process of applying for a mortgage involves agreeing with a lender the term over which repayments will be spread. The maths are pretty simple – the longer the term, the lower the monthly repayments. The type of mortgage that works for you depends on many factors – for example older applicants are often better suited to shorter mortgages and may even find that they aren’t eligible for anything longer. Generally, a mortgage with a term of 20 years or less is considered to be a shorter-term mortgage. Anything over 30 years falls into the category of a longer-term mortgage. According to data from Santander, half of home buyers would look at the option of a 40-year mortgage in order to ensure that they are able to buy now and also to reduce mortgage payments as much as possible on a monthly basis.
How does mortgage length impact on the numbers?
Purchase price: £250,000
Mortgage rate: 3%
= borrowing of £175,000
Making an application for a 25-year mortgage based on the above example would mean payments of £830 a month. Opting for a longer-term 35-year mortgage would generate payments of £673 a month. But the total amount you will repay will be £283,000 rather than £249,000 over the 25 year period.
The pros and cons of the longer-term mortgage
- With a longer-term mortgage you can reduce the payment you have to make each month. For many people, balancing monthly bills with existing income is the biggest financial priority and the opportunity to have smaller mortgage payments is very attractive. The mortgage is spread out over the longer term and, as a result, is more affordable.
- If interest rates go up borrowers with lower monthly mortgage payments won’t struggle in the same way as those with much higher bills to consider.
- It may be easier to meet lender affordability criteria with a longer-term mortgage, which makes borrowing more accessible for those on lower incomes.
- As house prices continue to remain high and incomes stall a longer-term mortgage may be the only way for some borrowers to get onto the housing ladder at all.
- A longer-term mortgage will cost more simply because the cash is being borrowed for a longer period of time. In some situations this may mean that double the interest is being paid – for example, for a borrower who is approved for a 40-year mortgage will pay twice as much as for a 20-year mortgage. However, remember that you do have the option to overpay on your mortgage, which could help to reduce overall payments.
- Longer-term mortgages extend a lot further into your future. So, depending on your age you may have to think about how you will meet the mortgage payments after you have retired.
- First time buyers today are older – the average age is now 33 according to government figures. A longer term mortgage may simply not be an option for someone in their mid 40s, for example, as the repayments will extend too far beyond the age at which the lender is willing to take a risk.
Characteristics of a shorter-term mortgage
- Higher monthly payments
- The mortgage is cleared more quickly over a shorter term
- Less is paid in interest overall
- More difficult to pass lender affordability criteria, especially for older buyers
- No need to worry about retiring with outstanding debt to pay off
It’s always worth remembering that a longer-term mortgage isn’t necessarily a permanent commitment. Once a current mortgage deal comes to an end it’s entirely possible for any borrower in the right conditions to restructure the mortgage to a shorter term.
The option of a longer-term mortgage does have its drawbacks, primarily the increased cost of borrowing for 35 or 40 years, as opposed to 25. However, if that longer term is the difference between getting onto the housing ladder or not, for many, it may be worth the risk.