Traditionally, mortgages would tend to last around 25 years, but the demand for longer deals has grown drastically. With people working and living longer, it comes as no surprise that there’s a higher demand for longer-term deals. Recent research has highlighted that 36% of first-time buyers now opt for a term 30 years and above compared to just 17% 10 years ago.
By taking the mortgage term over a longer period, you are in effect reducing your mortgage payments. This to some degree is beneficial since the longer the term, the easier it is to pass lenders affordability rules; but you will pay more interest in total as the loan will be in place for a longer period. Nevertheless, this option is particularly useful in parts of the country such as the Chilterns where house prices have remained high and homebuyers need to acquire larger loans.
The increased demand for long term deals can also be attributed to the slow growth in wages and increased standard of living. With more purchases being made later in life and families having to juggle multiple financial commitments, there is a real demand in borrowers wanting to stretch their terms to make their monthly payments more affordable along with borrowing later into life. It could also be said that many of the younger generations have a ‘buy now save later’ mentality which could be also attributed to why they’d rather stretch the mortgage term and spend elsewhere.
Research has also indicated that the average age of first-time buyers is rising, and this has led to home buyers wishing to take their mortgage over the age of 70 purely to meet affordability. It’s also been suggested that since the average age has risen, first-time buyers are driven to buying larger homes as opposed to buying starter homes or flats.
But is it a Good Idea?
This can work in one of two ways. By stretching the mortgage term borrowers are, in effect, reducing outgoings and this can make the qualification for a larger loan possible.
As previously stated, this does cost more. By extending the term you will pay more interest over the full term and less of the capital per month, for example:
A £250,000 mortgage over 25 years with an interest rate of 2% cost £1,059.64 per month which consists of paying roughly £640 in capital initially. In total, over the 25-year term, a borrower would pay £67,890 in interest.
However, if we extended the same loan over 40 years, payments would drop to a highly attractive £757.06 per month but only £340.39 is the initial capital reduction. The result is (assuming interest rates never change), in total, a borrower would pay £133,648 in interest nearly twice as much as the 25-year version.
It’s easy to understand why taking the longer-term option may be the best option for some but it’s best to know all the facts related to this choice before going ahead. Speak to one of our independent advisers as they can help you decide what term is the most suitable for your situation.