Lenders are stretching the loan terms on mortgages as cash-strapped first-time buyers struggle to get that first foothold on the ladder.
But though a longer-term mortgage might improve affordability for young buyers, experts are warning borrowers to be aware of the consequences.
Alliance & Leicester, Nationwide and Halifax can all lend over 40 years – 15 years longer than the traditional 25-year mortgage term.
Abbey and Northern Rock will lend over 35 years and specialist lender Mortgage Express, owned by Bradford & Bingley will lend over 45 years in some circumstances.
By stretching the loan term borrowers can bring down their initial monthly repayments. For example, someone taking out a £200,000 repayment loan at a rate of 5.7 per cent would have monthly repayments of £1,020.78 on a standard 25-year mortgage. In contrast, the same loan taken out over 35 years would reduce the monthly repayments to just £901.07 or down to £868.64 over a 40-year term.
But Brian Murphy, lending manager at Mortgage Advice Bureau, says stretching your loan term should only be a last resort.
‘Stretching a mortgage term to lower the repayments is a risky business,’ he warns. ‘It may never be the ‘right time’ to remortgage and take on the higher payments, which could leave a serious mortgage problem well into retirement.’
Most lenders will offer their full range of products to borrowers regardless of the term over which they choose to take the debt – for example, the best two-year fixed rates will be available whether you want to pay over 25 years or 40 years.
However, some lenders put age restrictions on some deals where a borrower wants to take the loan over an extended term.
Abbey will lend on a 35-year term but not if that takes the borrower beyond the age of 85 and Mortgage Express will lend on a 45-year term but not if it takes the customer beyond the age of 75 years.
‘I would advise all borrowers to keep their mortgage debt to as short a term as possible,’ says Murphy. ‘This enables them to free up money for pre-retirement investments. Also, borrowers must bear in mind that their income is likely to drop considerably in retirement.’
Mortgage brokers say it is important that borrowers review their mortgage arrangements regularly, shortening the term at a future date if possible.
‘There is no real danger in taking a 35-year mortgage now if you’re young,’ says one broker. ‘Provided the next time you mortgage you don’t extend the term again.’
Paying your mortgage off over 35 or 40 years will also increase the total amount you pay back compared with a 25-year mortgage. If you stick on a 40-year term it will cost you twice as much as a normal 25-year term mortgage.
Checklist for longer term mortgages
- Be realistic about what you will be able to afford in the future. If you are stretching now it may be difficult to ever bring the mortgage term down.
- When you remortgage in the future be sure that you try to get back to a more realistic payment profile as soon as possible.
- Do not rely on pension income to pay your mortgage in retirement. Many people overestimate how much cash they will have in old age – so be realistic.
- Consider alternative ways to make buying your first property possible, either through a higher loan to value or using a guarantor, such as a parent.