A standard mortgage used to run for 25 years but experts are reporting a growing trend for marathon loans spread over up to 40 years as first-time buyers and movers opt for lower monthly payments in an effort to bridge the gap between rising living costs and still-high asking prices.
New figures show the number of first-time buyers opting for a mortgage term longer than 35 years more than doubled during 2022 to 17%. The number taking out a loan over 30 to 35 years also increased – from 34% to 38% – during the same period, according to the banking group UK Finance.
This tactic could be one of the reasons why the big drop in property prices predicted for this year has not materialised, with many housing market watchers surprised by its seeming resilience.
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“At the moment, young people are in a really tough position because the private rental market is absolutely terrible, with a lack of homes available and rents rising rapidly,” Neal Hudson, a housing analyst at the research firm Residential Analysts, says.
“Despite the fact that mortgages are more expensive now … it is still more desirable to try to become a first-time buyer than stay in the private rental market, if you can.”
The obvious advantage of a longer mortgage term is that it brings down the monthly payments and, indeed, for some first-timers, it may be the only way they can afford to get on to the property ladder at all given the squeeze created by higher living costs, with UK inflation still more than 10%.
The idea of a timeline that could result in you still paying off your mortgage when you have started collecting your pension is not new, with loan periods getting longer in lockstep with rising prices. In 2005, the average term for a first-time buyer was just shy of 26 years but by the end of last year it was just over 31 years.
The market has adjusted to this new reality and, today, two-thirds (67%) of mortgages have a standard maximum term of up to 40 years, according to Moneyfacts, a financial data provider. That is up from about half only four years ago.
Back-to-back interest rate rises mean those moving home are also using longer terms to reduce their monthly commitment. Indeed, the number of home movers taking out terms of more than 35 years doubled to 8% in 2022, while for 30- to 35-year terms, the figure increased from 21% to 26%. However, the age of the borrower is a factor as a number of lenders require the mortgage to be repaid by the age of 75. They would also need to see that the mortgage would remain affordable throughout, not only at the beginning.
After years of ultra-low rates, mortgages started to become more costly last year as interest rates started to ratchet up. The cost of new fixed-rate deals increased after last autumn’s disastrous mini-budget but have since eased back. However, at the time of writing, Moneyfacts’ “best-buy” deals for first-time buyers carry rates of between 5% and 5.5%.
Longer terms are a direct consequence of the affordability challenge that high house prices force on to buyers, David Hollingworth, an associate director at the broker firm L&C Mortgages, says.
“It’s not healthy for borrowers to have to take longer and longer mortgages to try to afford a home. Ideally, the shorter the term, the better but buyers are looking for practical solutions to best manage their budget, and this can help.”
While lengthening the term of a home loan can give a buyer some “breathing space”, the flipside is that you end up paying a lot more interest, since you reduce the mortgage balance more slowly, he explains.
Based on a £150,000 repayment mortgage with a rate of 4%, Hollingworth says that on a 25-year basis, the monthly payments would be £792 and the total interest bill would come to £87,528 (see example). Change that to 35 years and the payments drop to £664 but the interest bill shoots up to almost £129,000.
Go to 40 years and the monthly outlay drops again to £627 but the interest on the loan is a whopping £150,917.
If things go well, borrowers can make overpayments or reduce the mortgage term when they remortgage, Hollingworth says. And unlike with, say, an interest-only mortgage, you will own a property at the end. “It costs more over the long term but you will at least reduce the capital balance and have paid it off at the end, even if it is 40 years later.”
Mortgage example
Term Monthly payment Total interest
25 £791.76 £87,528
30 £716.12 £107,803
35 £664.16 £128,947
40 £626.91 £150,917
Source: L&C Mortgages www.landc.co.uk
Based on £150,000 repayment mortgage at a rate of 4%
