Tue 31 Oct 2017 View all news articles

Taking on a 35-year mortgage term - The five minute guide

Growing numbers of borrowers are now taking mortgages over a 35-year term, a full decade longer than the traditional loan.

For many, this is the only way they can afford to get on the property ladder, as it cuts the cost of their monthly repayments.

The risk is that borrowers are stuck with a mortgage that runs into retirement and beyond, plunging them into a lifetime of debt, especially with interest rates likely to start rising from next month.

Forever mortgage
In 2005, just 2.7 per cent of all mortgages were over a 35-year term, but now that has soared to 15 per cent and is rising all the time, according to new fi gures from The Money Charity.

David Hollingworth, mortgage broker at L&C Mortgages, has seen the same trend, with 22 per cent of fi rst-time buyer customers now spreading their loan over 35 years, as many cannot afford to buy any other way.

“Previously, they may have used interestonly loans to reduce their monthly outgoings in the early years of the mortgage, but now these are only available to those with a high deposit and very high salary,” he said.

By stretching a £150,000 mortgage at 2.5 per cent from 25 to 35 years the monthly repayments will drop from £673 to £536, a reduction of £137 a month.

However, you will repay an extra £23,358 over the longer term, £225,261 in total instead of £201,903.

Double blow
Many younger borrowers have little choice, with the average fi rst-time buyer property hitting a record high of £207,693, says Sarah Coles, personal fi nance analyst at Hargreaves Lansdown.

She adds: “They also face stagnant wages, rising living costs and tough affordability tests from lenders, adding to the squeeze.”

There is another problem to extending your mortgage, she says: “The danger is that you will be battling to clear your debt far later in life. Given that the average fi rst-time buyer is 30, they could be paying their fi rst-ever mortgage to age 65.”

Also, people tend to buy several properties during their lives, making it even harder to clear the debt before they stop working.

Cole says this has a knock-on effect on people’s ability to save in a pension: “Traditionally, once you cleared your mortgage you focused on your pension, but now that period is being squeezed.” This means that younger people face the double whammy of longer mortgage terms, and lower retirement incomes.

In a fix
Mortgage debt has now hit record highs and longer loans are likely to make this issue worse. The average outstanding mortgage stood at £121,678 in August, up from £109,487 four years ago.

First-time buyers typically borrow 3.63 times their income and The Money Charity’s acting chief executive Steph Hayter says this will rise if the Bank of England increases interest rates next month as many expect: “That could make it even harder for households to pay off their debts. The rising amount we owe on mortgages should be a concern to all of us.”

She urged those with large outstanding debts, especially on variable-rate mortgages, to prepare for higher monthly repayments.

November hike
Five million borrowers on variable rates will pay an extra £83 million in total this December, if the Bank hikes rates by 0.25 per cent, according to online mortgage broker Trussle.com. That is nearly £1 billion a year.

Somebody with a £200,000 mortgage would pay an extra £25 a month, or £300 a year. Trussle founder Ishaan Malhi says: “Borrowers on variable rates should consider how to cover the extra cost, especially those on a tight budget or with a large mortgage.”

It may be worth remortgaging to a fixed rate, but you will have to act fast as the Bank’s Monetary Policy Committee meets on Thursday.

Longer mortgage terms and higher rates make a toxic combination.

Want to discuss your mortgage options? For a free, no obligation, chat with our recommended mortgage advisor, please contact your local branch.

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