Mortgage terms are getting longer, especially for first-time buyers.
Twelve years ago about half of all first-time mortgages were for 25 years or less. And only one in six first time mortgages was for 35 years or more.
2019 figures show how the mortgage world has changed. This year only 22% of first-time mortgages is for 25 years or less. And a dramatic 36% are for more than 35 years.
So from being a small minority, these extra-long mortgages are now common.
But what is the right length mortgage for you? Is a very long term a sensible choice, or is it setting up potential problems in the future?
Terms are getting longer to reduce monthly mortgage repayments
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.
Lenders will perform an affordability check before offering a mortgage. Sometimes their model will say the monthly payments on a 30-year mortgage are too high for you to manage (even if you think you are already paying more than that in rent!) but a 35-year mortgage was possible.
This is one reason why terms for first-time buyers tend to be longer – they often have the biggest affordability problems.
The other reason is that many older buyers won’t be offered very long terms. As Which? points out :
Lenders put caps on the maximum age you can be when you come to the end of your loan, so in the main, 40-year products are only really suitable for younger buyers.
The downsides for borrowers
By opting for a lengthy mortgage, you are delaying the point you are mortgage-free. That may mean you have to retire later or stay in a stressful job for longer.
Retirement, health problems and pensions may all seem a long way away when you are 30, but your choice of a mortgage term could make a significant difference to your life many years ahead.
Paying more interest over the whole term
More affordable – that makes a longer mortgage sound good, doesn’t it!
But the downside is that you will pay far more interest overall with longer mortgages. 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:
| monthly payment |
total interest paid |
capital repaid after 5 yrs |
|
| 25 years | £528 | £58,284 | £12,902 |
| 30 years | £477 | £71,788 | £9,558 |
| 35 year | £443 | £85,867 | £7,261 |
| 40 years | £418 | £100,491 | £5,614 |
Fewer deals available?
Which? estimates that if you need a mortgage that is longer than 35 years, you are cutting the numbers of potential lenders in half.
At the moment, in 2019, there is a lot of competition in the market and you can get good rates on these deals. But if you need to remortgage when a fix ends, you are taking a risk on how many lenders then will be offering very long mortgages.
“But it’s just at the start”
A long mortgage may look like your only way to get onto the housing ladder. You may 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 in 2019 are really low. In three or four years it is likely that your mortgage costs will already have risen.
And after a few years, you may want to move to somewhere bigger as the family expands or gets older.
So you may face a double hit of wanting a larger mortgage when interest rates have risen. Reducing your mortgage term at that point will lead to much larger mortgage payments.
So should you go for a very long term mortgage?
There are three groups of people that can find long mortgages a perfect product:
- 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;
- you expect to get significant bonus income which your mortgage lender isn’t taking into account – then you can plan to use your bonus to overpay the mortgage and shorten the term every year;
- 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 if you expect to move and borrow more in a few years, it’s good to be wary of taking the “easy” option of lower mortgage payments now.
With mortgage rates still at very low levels, 2019 is the perfect time to be repaying your mortgage as fast as possible, not as slowly.
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James says
Hi Sara
You’ve helped me out with payday loans & credit card queries, & in 3 months my credit card debt will be gone so thanks,
I am planning on buying a flat end of the summer next year, I’ve looked at soft quotes on mortgages and over 25-28 years I can be leant 190k-200k, if I look at a 40 year mortgage can I then borrow more ?… this is the difference between getting a 1 bedroom flat and a 2 bedroom flat
Thanks
James
Sara (Debt Camel) says
Yes you can often borrow more if the mortgage is longer as the repayments are lower.
Can I ask how old you are? Do you need two bedrooms?
Do you think you could overpay the mortgage?
James says
Hi Sara
Thanks, I am 33 so I will be buying when I’m 34, I’ve seen most will give you a 40 year mortgage 35 or under and some even go to being 40 years old
I don’t need 2 bedrooms, advice from my parents is to get a 2 bed, I could get a 1 bed in my location for around 230k, & a 2 bed around 300k (maybe a little more), I’ll have a 45k-55k deposit
Yes I will definitely be able to over pay, I’m happy to spend £1000 a month on mortgage & interest repayments (40% of my monthly take home after tax), I’ve obviously looked at various options and if I was to borrow 250k over 40 years, I’ve done this at a rate of 2.5% interest (i have no idea what interest rate I’ll get but I know I probably won’t get this 0.5% that are currently around with my credit history) & this is. Repayment of £825 a month
Or I borrow 170k over the same length of time for a 1 bed which is £560 a month but then I may look at 30-35 year mortgage
Sara (Debt Camel) says
So you have done the arithmetic. Do talk to a broker now about possible rates.
This isn’t financial advice but the obvious which is probably what your parents are thinking of – a 2 bed flat is a lot more flexible. If you get a partner extra space makes life much nicer. You could get a lodger for a few years – tax free income to blitz the mortgage down? And for many people being able to shut the door on your study is the difference psychologically between “working from home” and “living at work”.
James says
Hi Sara
Yes I am really looking forward to getting my own place, I’ve rented with other people for so long be nice to just have some peace, however work have announced we’ll be wfh 3-4 days a week after Covid so it would make sense having that space for work, & if I can borrow that much I will go for that option,
You may have already done this in another article could you recommend any mortgage brokers that work with people like me with a pay day loan history ?
Thanks
James
Sara (Debt Camel) says
ah. When was your last payday loan?
James says
My last payday loan was taken out February 2018, my last payday loan was paid off in December 2019,
I do have a loan with ‘likely loans’ at 28% interest which is completely paid off this June (if not earlier), but with it not being a payday loan hopefully this doesn’t matter
Sara (Debt Camel) says
ok they should probably be OK as you have a decent deposit. Definitely talk to a broker.
James says
Thanks Sara I’m not gonna look to get a mortgage for another 12+ months so hopefully that helps, can you recommend any brokers ?
Thanks
James
Sara (Debt Camel) says
Time definitely helps.
London & County and Habito are commonly suggested. You should not need a “bad credit” broker.
James says
Ah fantastic thanks for your advice!
James
Louise says
Hi Sarah
I’m a single 26year old who’d like to purchase my first house. My salary is £46,895. In London a 2 bed house I’ve seen will cost £275k, with a £30k deposit. I’ve been offered a 37year mortgage to afford this. Is this a good idea or way too long? With a standard 25year mortgage I’ll be looking at a 1 bed flat according to the numbers. I’d 100% be getting a lodger (have looked into the law, tax free amount etc) so would be easy for me to overpay the mortgage.
Sara (Debt Camel) says
2 bed houses are so much more flexible. If the numbers work for you, I would take the 2 bed and a lodger for the first few years. Who knows if you will meet a partner and want the extra space? or earn more and enjoy being able to work from home in your own office?