Borrowers could save £255 a month by taking out a 40-year mortgage term, making it a more affordable option for first-time buyers struggling to get onto the property ladder.
This is according to Moneyfactscompare.co.uk, which has analysed term options to help first-time buyers facing affordability challenges.
It based its calculations on a buyer borrowing £250,000 at a rate of 5.05%, which is the current Moneyfacts Average Mortgage Rate.
Typically, most borrowers have used a 25-year term when taking out mortgage – and the repayment calculations are therefore based on the borrower repaying at the rate offered over this time.
But, increasingly, more borrowers are signing up for terms of 35 or even 40 years to boost their affordability.
Rachel Springall, finance expert at Moneyfactscompare.co.uk, said: “As consumers work for longer it’s easy to see why the majority (85%) of mortgages allow them to push their term to 40 years.
“Those prioritising their homeownership plans over their pension may well choose a longer-term mortgage to more comfortably afford mortgage payments.
“However, being asset rich and cash poor in retirement can lead to borrowers paying their mortgage for longer, incurring more interest and eventually they may turn to equity release to boost their disposable income.”
She added: “A maximum mortgage term of 25 years would have been relatively standard in the past, particularly when house prices were lower, but the majority (68%) of first-time buyers are now taking out mortgages with a term of 30 years or more, according to the Financial Conduct Authority (FCA).”
40-year mortgage terms – what to consider
A 40-year term should be considered carefully by borrowers. Since they will be committed to paying their mortgage for longer, they will be saddled with the debt for longer.
Also, more interest will build up compared to a shorter-term deal, and borrowers will therefore end up paying more overall.
However, Springall explained there is a potential solution for first-time buyers considering the longer term – making overpayments.
She explained, those people taking out a 40-year term mortgage instead of a 25-year term will reduce their monthly payment by £255 per month, if they borrow £250,000.
However, if these 40-year term borrowers could afford to overpay by £200 per month, it could shave almost 13 years off the mortgage term, saving them around £123,000.
Spring explained most lenders allow borrowers to overpay by 10% of their outstanding mortgage, but some may allow more.
For anyone considering taking out a longer term, it’s a good idea to speak to a mortgage adviser to understand if it’s suitable.
