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Chestertons News 25 July 2017

Bank of England warns over 35 year mortgages

According to figures from the Bank of England, one in seven home buyers (15.75%) are signing up for mortgages of 35 years or longer – a notable increase on 2005, when just 2.7% of buyers took terms this long. In contrast, traditional 25-30 year mortgages have dropped, from 38% of approvals in 2005 to just 24% today. Although mortgages lasting 35 years or more have been available for a long time, their share of the market has increased significantly in the last decade. It is believed that rapid house price growth has encouraged borrowers to sign longer mortgage deals as a way of reducing monthly payments, easing affordability pressures and increasing chances of application success.

Although it is also possible the changes simply reflect the fact that people are living and working longer, with one in five mortgages taken out for terms of between 30 and 35 years, the Bank of England is warning that buyers may be borrowing well into retirement and paying back thousands more than on a shorter-term. While taking out a longer-term mortgage might be the only way some people can afford to get on to the property ladder right now, balancing the time-frame of repayment against affordability should be key factors when deciding the length of a mortgage. For example, the total repayments on a £175,000 mortgage loan at 3% for a £250,000 property would differ by £32,000 over a 25-year mortgage versus a 35-year term.

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Henry Knight, Managing Director of Springtide Capital said: "We have certainly seen an increase in mortgage terms, where lenders are comfortable that the loan lies within an ever-increasing working lifetime. This provides a good opportunity for young buyers who have a long working life ahead of them. However, it's important to remain conscious that entering into a mortgage for the next 30-35 years is a big financial commitment and some people want to maximise their repayment to pay off their mortgage faster. It is vital to get sound financial advice when considering any property purchase to understand the impact on interest and total costs involved. Paying off the debt is always the end game, changing mortgage products when a term ends is also a fantastic opportunity to look at whether the length of mortgage can be shortened."

Top Tips:

  • Think about what age you want to take a mortgage up to and get financial advice based on your personal circumstances
  • If you're signing up for a fixed-rate mortgage, make sure you switch before it reverts to your lender's standard variable rate
  • If you could find yourself in a position to make over payments, ensure you have a mortgage where there are no penalties for this