Advantages of extending the mortgage term to four decades are that the repayments are lower over a monthly basis.
However, on the flip side of the coin, it also means borrowers are extending the period over which they are paying interest and therefore could end up paying more over time.
There are also concerns, by stretching out mortgages for an additional 15 years many borrowers may still be repaying their home loan into retirement.
But for all the pitfalls, it would seem many of the banks, building societies and other lenders are offering customers the option to extend their mortgage terms to meet a growing demand.
Figures out today from Moneyfacts.co.uk, reveal the majority – 57% – of mortgages have maximum terms of 40 years.
A high proportion – that is 35% according to Moneyfacts – also have maximum terms of 35 years. Meanwhile, those mortgages rigidly sticking to the traditional term of up to 25 years now only account for just under 3.5% of the market.
The latest lender to increase its maximum term to 40 is Yorkshire Building Society which, at the same time, also raised its maximum age to 80.
It said demand for these longer-term mortgages had grown since the financial crisis. In fact, it’s figures show almost half of first-time buyer mortgages were on a typical term of 25 years back in 2007 compared to only a fifth in 2019.
Bigger homes and older first-time buyers
One of the reasons behind this demand, Yorkshire suggested, was the changing profile of a first-time buyer home. For, no longer are newbies to the property market taking their first step on the ladder with a starter home. Instead, a growing number are setting their sights on larger, often detached, homes.
But it also said the average age of the first-time buyers – which is on the up – is also having an impact on lenders increasing the terms.
Charles Mungroo, senior mortgage manager at Yorkshire Building Society, said attitudes of first-time buyers were altering.
“Along 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,” he said.
“As a responsible lender, we need to make sure mortgages are affordable to customers across the term of their entire loan. By extending our maximum borrowing term to 40 years this allows customers like first-time buyers to find an affordable home that meets their needs.”
Affordability
In fact affordability is the main advantage, according to Moneyfacts, of opting for an extended mortgage term.
Darren Cook, finance expert at Moneyfacts, explained by extending their mortgage term borrowers would most likely reduce their monthly repayments. This, he said, meant they would stand more chance of meeting strict criteria on affordability set by lenders.
What’s more, with many lenders increasing the maximum age on a mortgage, this means borrowers who are older than the average first-time buyer age can stand a better chance of taking out a mortgage.
Cook said as many as 83% of residential mortgages could end when the borrower was 70 years of age or older.
Pitfalls of extended your mortgage term
While a longer-term mortgage will reduce your monthly repayments, the additional interest that accumulates over an extended period could be ‘considerable’, Cook warned.
He explained at £250,000 mortgage with a rate of 2.5% over 25 years would result in a monthly repayment of £1,121 with total interest of £86,463 over the term.
The same mortgage taken over 40 years would reduce the monthly repayments to £824 but would increase the interest to a total of £145,733 over the term.
By extending the term to 40 years, borrowers would be increasing their interest payments by nearly £60,000.
Cook added: “Furthermore, the longer a borrower extends their mortgage term, the older they will be when they have finally repaid their mortgage.
“An extended mortgage term may go beyond pension age, so it is imperative that these borrowers consider their options and attempt to make provisions if their personal circumstances change.”
Getting advice
If you are unsure about whether a longer term mortgage is right for you, it’s probably best to speak to a broker. They will help you consider the pros and cons and guide you through the calculations.
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