One in five first-time buyers has opted for mortgages lasting over 35 years, marking a new record, as revealed by UK Finance, the trade body representing lenders. This trend of increasing mortgage terms has been highlighted by mortgage broker John Charcol.
According to a statement from John Charcol, there is a clear connection between rising property prices and the lengthening of mortgage terms. While in the past, the default option for many applicants would have been a 25-year mortgage, there has been a consistent upward trend in recent years, with first-time buyers (FTBs) increasingly choosing mortgages lasting 35 to 40 years.
The broker attributes this shift to the unexpectedly high increase in property prices during the pandemic, which has been fuelled by pent-up demand and low interest rates. Consequently, clients are compelled to stretch their budgets in order to step onto the property ladder, often achieved by extending the mortgage term to reduce monthly repayments.
John Charcol also notes that it’s not just FTBs who are opting for longer mortgage terms. Homeowners nearing the end of their fixed-rate deals are also seeking extensions, motivated by rising mortgage rates and household expenses such as utility and energy costs. Some lenders have adjusted their attitudes and now accept applicants beyond a certain age, as long as the mortgage is set to end before the age of 75.
However, John Charcol warns of the risks associated with choosing a longer mortgage term. While monthly payments may decrease, the overall cost of borrowing increases, as interest is paid over a longer period on a slowly reducing mortgage amount. The broker advises borrowers to review their mortgage term at the end of each fixed-rate period, during remortgaging or when considering a move, to ensure the best decision is made and potentially save thousands in the long run.
For FTBs, the broker highlights the advantage of time, as earnings are expected to increase during the mortgage term. It is crucial to regularly review the mortgage term and adjust accordingly to optimize financial circumstances.
John Charcol also recommends homeowners with longer mortgage terms to consider making overpayments. Many fixed-rate products allow overpayments of up to 10% of the outstanding balance each year, enabling borrowers to pay off their mortgage more quickly.
Furthermore, the broker raises concerns about the inadequate retirement preparations of FTBs opting for extended mortgage terms. It is generally advised to contribute at least 15% of income to pensions each month for a comfortable retirement. Extending the mortgage term or allocating more income to mortgage payments may hinder the growth of pension pots, as they may not have sufficient time to increase before retirement.
In summary, the rising popularity of longer mortgage terms among first-time buyers and homeowners is attributed to soaring property prices and the need to manage monthly repayments. However, borrowers must carefully consider the long-term implications, as longer terms increase the overall cost of borrowing. Regular reviews, potential overpayments, and adequate retirement planning are essential aspects to be mindful of when opting for extended mortgage terms.