Are 35 or 40 year mortgages a good idea?

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:

1. 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;
2. 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;
3. 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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