With property prices rising and many young adults struggling to get on the property ladder, mortgage lengths are increasing. More mortgage products that allow homebuyers to spread repayments over a 40-year period are on the rise. It can be an effective way to reduce outgoings each month, but it does come at a cost.
Research from Moneyfacts found that over half of all residential mortgage products have a standard maximum mortgage term of up to 40 years. This is up from around 35% just five years ago. In the past, a 25-year mortgage was considered standard. However, as wages have remained static while property prices have continued to climb over the last decade, it’s not surprising the market is changing. Even with low-interest rates, many aspiring homeowners would struggle to pay off a mortgage in 25 years, lengthening the term provides more flexibility.
While an increase in 40-year mortgages could help more people get on the property ladder, it does risk placing pressure on finances in the future. Coupled with the average age of first-time buyers increasing, there’s a risk that some homeowners could still be paying their mortgage in retirement.
The cost of paying a mortgage for longer
A longer mortgage term can seem tempting, but one key thing to keep in mind is the additional costs of doing so.
Let’s say you borrow £200,000 to purchase a home with an interest rate of 3%. With a 25-year mortgage, you’d be paying £948 each month, totalling £284,527 over the full length. In contrast, with a 40-year mortgage, you’d be paying just £716 each month, saving £232. However, over the full mortgage term, the repayments would add up to £343,665; £59,138 more than if you selected a 25-year mortgage.
As a result, when choosing a mortgage product, it’s important to consider both short and long-term financial implications.
The advantages of a 40-year mortgage
Lower monthly repayments: The clear advantage of choosing to pay a mortgage over a longer period is that your monthly repayments will be lower. It can make owning a home more affordable and increase disposable income. It can help improve your financial security in the short term.
Greater flexibility: Often you’ll be able to overpay your mortgage to a certain level without incurring additional charges. This allows you to overpay when your finances are secure and cut back to the standard rate when you face other bills. It’s a degree of flexibility that may be attractive to you if your income isn’t stable or you have other saving goals too.
Ability to purchase a larger house: Lenders must now stress test your ability to meet repayments, including if interest rates were to rise further. This may restrict how much they’re willing to lend, particularly if they’re unsure whether you can meet repayment commitments. Lowering monthly outgoings is one solution for boosting the amount that can be borrowed.
The drawbacks of a 40-year mortgages
Interest paid: As detailed above, over a 40-year mortgage you’ll be paying significantly more than if you chose a traditional 25-year option. In some cases, reducing your disposable income now in favour of paying less interest over the long term will be an attractive choice.
Paying later in life: For many, paying off their mortgage is a milestone they look forward to. A 40-year mortgage means this will come later in life and it may be after the date you hope to retire. Considering how a longer mortgage term will affect your other plans is important for ensuring it’s the right decision for your aspirations.
Slow build-up of equity: As you’ll be paying less each month, your equity in the property will increase at a slower pace. This could be an issue if you hope to move home relatively soon or property prices were to decrease, putting you at risk of negative equity.
Ultimately, whether taking out a longer mortgage is right for you will depend on your financial situation and priorities. It’s worth noting that taking out a 40-year mortgage initially doesn’t mean you’re stuck with it for the full term. Remortgaging when you have more disposable income, for example, can help you reduce the term and benefit from lower outgoings to begin with. Many mortgage products will also allow you to overpay, reducing the capital owed quicker.
Whichever mortgage option you decide is right for you, it’s important to look at in the context of your personal finances. If you’d like help understanding your situation and the options available, please contact us.