Borrowers turn to 30-year mortgages

More borrowers are taking out mortgages with longer repayment periods than ever.

One in five new mortgages taken out between April and June this year were for 30 years or more.

This number has shot up in the past decade, from just 4.5% of borrowers taking out mortgages over such a long term a decade ago.

Why the upsurge?

There are a number of different explanations for this increased popularity for long mortgage terms, most notably the increasing cost of buying a house.

The Council of Mortgage Lenders (CML) said that borrowers are having a harder time making mortgage repayments because of the increases to house prices and potentially higher interest rates.

This is the first data released since the Mortgage Market Review (MMR) came into force in April. The CML argued that tougher affordability checks, which have come in as part of the MMR, are pushing first-time buyers towards longer mortgages.

For first-time buyers who want to get on to the property ladder, the lower initial repayments are a big plus.

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The problem with long-term loans

Extended mortgage periods are often a sign of a property market that is under stress. It was a similar case with Ireland’s pre-crisis boom which saw an increase in mortgage terms of 30 and 35 years.

A key issue with these types of mortgages is that they leave borrowers more vulnerable to house price falls and add thousands of pounds more interest to a buyer’s mortgage debt.

It also puts the borrower at greater risk of defaulting on repayments, particularly if the term goes past their retirement age when their income dries up.

CML data also shows that more people have remortgaged their homes over the past year with a loan that lasted for more than 30 years. Figures like these suggest that some borrowers are rolling out debt in to retirement.

In real terms

The average mortgage in the UK is currently sitting at £125,000. Over a traditional 25-year mortgage term at 5% interest, you're looking at monthly repayments of £731. Over the term of the mortgage, that will cost you a total of a little over £219,000. 

Now, let's stretch that out to 30 years. The monthly repayments drop to £677 a month, a saving of £60 a month compared to a 25-year term. But those extra five years of repayments will cost you - the total you'll pay back is £241,570, an additional £22,000 in interest payments. 

Move all the way to 40 years - HSBC is one lender that will consider lending over such a long term - and the repayments drop down to just £603 a month. But over the long run, it comes to £289,318, an additional £70,000 in interest compared to borrowing over a 25-year term.

The lesson in this should be clear - don't be tempted into stretching your mortgage term too far in order to cut your monthly repayments, as it will cost you far more in the long run!

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Do you have a mortgage of 30 years or more? Why did you decide to go for a longer term? Tell us in the comments below.

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