First-time buyers are increasingly turning to 35-year mortgages over traditional 25-year terms, Halifax data has revealed.
A quarter of mortgages last year were for a 35-year term, up from 16 per cent in 2007, according to the lender.
A longer mortgage means lower monthly repayments, which could increase a borrower’s chance of application success, but you would end up paying more than £9,000 extra on a typical home loan.
Longer term: A 35-year mortgage can reduce monthly repayments but is more expensive long-term
Traditionally homebuyers have taken out 25-year mortgages but rising house prices and tougher affordability tests have pushed lenders and brokers to favour longer terms.
The longer the mortgage term is, the cheaper the repayments as they are spread over more months.
But you are also saddled with the debt for more years and end up paying interest for longer, pushing up the overall cost of the loan. The only way round this is to overpay your mortgage or regularly remortgage to get lower rates.
Halifax’s data also revealed that over the same period 35-year terms grew in popularity, the share of 20 to 25-year mortgages dropped from 48 per cent to 30 per cent.
Andrew Montlake of Coreco mortgage brokers says his business has seen more first-time buyers taking out extended terms over the past 18 months.
He explains: ‘Part of this is undoubtedly down to cost, with borrowers preferring to push out the term and pay a lower monthly amount initially, but part is also to borrowers having a more realistic discussion with their advisers around affordability and their expected retirement ages.
‘Another reason is that due to the changes in affordability calculations of lenders, some borrowers can now only obtain the amount they require by extending the term further.
‘The reality is that most first-time buyers do not keep the same mortgage for the whole term of the loan and when it comes to remortgaging another discussion over the term is had and many borrowers are keen to reduce the term accordingly at that point.
‘There is no reason to force people into a rigid 25-year model that may not suit either their levels of affordability or ultimate aims and repayment plans’.
How much could you save with a longer mortgage term?
The longer you take a mortgage for, the cheaper the repayments as you are spreading them out.
But you also pay the interest for longer.
Futureproof: Would you take out a 35-year mortgage?
The lowest two-year fixed rate on the market at 60 per cent loan-to-value is 1.14 per cent from Yorkshire Building Society with a £1,475 fee.
Over 25-years, a £150,000 mortgage would cost £574.87 a month and £173,934 over the lifetime of the loan.
In comparison, extending the term to 35 years reduces repayments to £433 and gives a total cost over the lifetime of loan of £183,455.
You technically end up paying £9,521 more over the life of the product by taking it out for ten years longer.
This amount can be decreased by overpaying and borrowers are also likely to remortgage to a different fixed rate at the end of a deal term. This should change the monthly repayments and hopefully pay down the debt quicker.
Should you take out a 35-year mortgage?
Brokers are all for longer term mortgages to help get buyers onto the property ladder.
Choosing between a 25 and 35-year term could be the difference between rejection and acceptance for a borrower. The bank may want the security of more repayments before making an offer.
But this only really works if you play the system and overpay when you can and remortgage onto new rates when your offer expires. This should keep your costs down and reduce the overall term.
Jonathan Harris of brokers Anderson Harris, says: ‘We often advise first-time buyer clients to take the longest mortgage term possible. The irony is that by the time you get to your mid-forties, chances are you’ll be asking for the longest term you can get and will find it is much shorter than you would like.
‘First-time buyers, who have never had to run a house and are used to calling their landlord in the event of the boiler breaking, should seriously think about factoring in upkeep of the property into their monthly budgets. If they keep their mortgage payment as low as possible, any spare cash can be used on other expenses, which inevitably arise as a homeowner.
‘While a longer mortgage term means cheaper monthly payments, you make many more of them, costing you more in the long run.’
Borrowers can reduce their repayments by overpaying, he said, adding: ‘Most fixed-rate mortgages, which the majority of first-time buyers tend to opt for, allow borrowers to overpay by up to 10 per cent of the mortgage amount per year without penalty. So if you can pay overpay each month you can pay the debt down at your own pace, but are not contractually obligated to, which allows you flexibility.’
‘WHY I TOOK OUT A 35-YEAR TERM’ BY THIS IS MONEY’S LAURA WHITCOMBE
I bought my first home three years ago and with property prices as they are in the South East it was a way to keep the monthly repayments affordable. I bought with my husband and as we were both in our late twenties at the time, we will still be younger than the state retirement age – which will probably be far higher for our generation than it is today.
Me in my kitchen, which has cost me thousands thanks to damp, a leak and a missing lintel. Those lower monthly repayments were a lifesaver
Cash flow was our most important consideration when we chose our mortgage. As first-time buyers who had rented furnished property for a decade, we knew we would have to shell out thousands of pounds on furniture, decorating and home improvements not long after moving in. And we were right!
Both me and my partner work in finance and were more than aware that longer mortgage terms can work out more expensive over the long term. To tackle this issue, we plan to regularly switch to the most competitive mortgage rates we can every time we need to remortgage.
We are about to do so for the first time and luckily the rate we can secure is about half the one we are currently on – thanks to a bump in our property value.
The deal we’re switching to also allows overpayments and we hope to be able to make use of this facility to keep trimming our outstanding balance.
Long mortgage terms may not suit everyone but a 35-year term is working well for me – so far.
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