Are 35 or 40 year mortgages a good idea?

Most mortgages used to be 25 years, unless you were nearing retirement when they would be shorter.

But as the following graph from a 2017 Bank of England report shows, more than 15% of new mortgages are now for 35 or more years.

And first-time buyers are increasingly going for longer mortgages: First-time house buyers choosing 35-year mortgages as a quick fix for cashflow problems.  Partly that is because first-time buyers often have the biggest affordability problems. But Which? pointed out in 2018 that:

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.

So many older buyers will be ruled out because of their age.

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.

Lenders have to perform an affordability check before offering a mortgage. Sometimes their model will say the monthly payments on a 30 year mortgage are too high but a 35 year mortgage was possible.

The cost for borrowers

Paying more interest over the whole term

“Affordable” – that makes a longer mortgage sound good, doesn’t it! But the downside 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:

	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 early 2019, there is a lot of competition in the market and you can still get good rates on these deals. But if you need to remortgage when a fix ends, you are taking a risk that there are still a lot of lenders wanting to take on 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 at a record low at the moment. 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/gets older. Switching to a larger mortgage and a shorter term at the same time could be very expensive.

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 your 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 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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