Most mortgages used to be 25 years, unless you were nearing retirement when they would be shorter. But new lending figures from the Halifax in January 2016 showed that a quarter of of first time buyers took out a 35-year mortgage in 2015. 40 year mortgages are no longer very rare. But are these a good idea for the borrower?
Why is this happening?
Long mortgages have lower monthly payments because the capital is repaid more slowly. Usually the borrower asks for this, but it can also be suggested by the mortgage lender.
Since April 2014, lenders have to perform an “affordability” check before offering a mortgage, and sometimes their model will say a 30 year mortgage is unaffordable but a 35 year mortgage was possible.
The cost for borrowers
“Affordable” – that makes a longer mortgage sound good, doesn’t it! But the down side is that you will pay far more interest overall. And if you want to move after a few years, you may be horrified at how little capital you have repaid in a long mortgage.
Look at the figures for a mortgage of £100,000, assuming the interest rate is 4% throughout:
after 5 yrs
“It’s just at the start”
For many people a long mortgage may look like the only way to get onto the housing ladder and they plan to remortgage to a shorter term or to start overpaying after a few years.
There are a couple of problems with this plan. First mortgage rates are at a record low at the moment, so in three or four years it is likely that your mortgage costs will already have risen. Secondly after a few years you may want to move to somewhere bigger as the family expands / gets older – switching to a larger mortgage and a shorter term could be very painful.
Are the regulators worried?
Regulators don’t like very long mortgages. As the governor of the Bank of Canada said in 2008 “if everyone has a 40-year amortization mortgage, then you just have higher housing prices“. In Canada rules were then introduced so you could only have a mortgage over 25 years long if you had a deposit of at least 20%.
That might not sound very relevant to Britain in 2015, but the governor of the Bank of Canada then was Mark Carney, who is now governor of the Bank of England…
At the moment the Bank of England’s macro-prudential tools don’t include limiting mortgage terms, but if the current trend for longer mortgages continues, the Bank may want to get powers to restrict this. If it does, this could leave current borrowers with long terms in a difficult position if they want to move and borrow more. There are hundreds of thousands of “mortgage prisoners” at the moment, unable to move because their current interest-only mortgages are no longer available – a similar situation could develop with 35 and 40 year mortgages.
So should you go for a very long term mortgage?
There are two groups of people that can find long mortgages a perfect product:
- if you are at an early stage of a career where significant pay rises are very likely to come over the next 5-10 years without you needing to move house;
- if you expect to get significant bonus income which your mortgage lender isn’t taking into account – then you can plan to use you bonus to overpay the mortgage and shorten the term every year.
Additionally, if you are buying your “forever home” – you don’t intend to move again – then you may not be worried by the extra interest you will be paying.
But other people, who may need to move and borrow more in a few years, should be wary of taking the “easy” option of lower mortgage payments now. With mortgage rates at very low levels, now is the perfect time to be repaying your mortgage as fast as possible, not as slowly.