Mortgage lenders have reacted to ever-rising house prices by introducing loans lasting up to 52 years. Would you want one?
Recently, I've been re-reading one of my favourite books: Devil Take the Hindmost: A History of Financial Speculation. In this fascinating account, historian and banker Edward Chancellor uncovers the history of financial booms and busts from the 17th Century to the present day.
In chapter nine, Kamikaze capitalism: The Japanese Bubble Economy of the 1980s, Chancellor discusses the massive rise (and subsequent nose-dive) in Japanese property and share prices during the Eighties and Nineties. As property prices spiralled out of reach of all but the wealthiest buyers, Japanese banks reacted by introducing lengthier and lengthier mortgages. Ultimately, many borrowers could only climb the property ladder by taking out 100-year 'inter-generational' home loans -- literally, loans for life and beyond!
I was reminded of this chapter when I read a Press release from Moneyfacts yesterday. For many decades, the standard term for a UK mortgage has been 25 years. However, with affordability becoming increasingly difficult, especially for first-time buyers, a 25-year mortgage simply won't stretch far enough.
Hence, the survey found that the majority of mortgage lenders now allow borrowers to spread their home loan over a longer period, which brings down the monthly repayments. Incredibly, some lenders are willing to lend money over 52 years -- more than the average person's working life! -- as the following table shows:
Maximum term (years) | No. of lenders | % of lenders |
|---|---|---|
25 | 33 | 20 |
30 | 47 | 29 |
35 | 28 | 17 |
40 | 44 | 27 |
45 | 3 | 2 |
49 | 2 | 1 |
52 | 7 | 4 |
TOTAL | 164 | 100% |
As you can see, mortgage lenders have happily banished the 25-year home loan to history, with four in five (80%) now willing to lend over thirty or more years. Then again, 80 out of 164 lenders (49%, or close to half of the total) still insist that homebuyers stick to a 25- or 30-year timescale for repaying their debt.
My big worry is those 56 lenders (34%, or over a third) which allow repayments over a 40- to 52-year period. A 52-year mortgage arranged on your eighteenth birthday will not be repaid until you hit seventy, which is nothing short of financial suicide!
Of course, the snag with extending the term of your mortgage is that this will dramatically increase your overall interest bill, as the following table shows:
For a repayment mortgage with a yearly interest rate of 5.25%
Term (years) | Interest bill (£) | Extra interest (£) |
|---|---|---|
25 | 103,706 | |
30 | 128,430 | 24,724 |
35 | 154,327 | 50,621 |
40 | 181,294 | 77,588 |
45 | 209,239 | 105,533 |
49 | 232,237 | 128,531 |
52 | 249,823 | 146,117 |
As you can see, jumping from a 25-year loan to one lasting 40 years will add almost £78,000 to your interest bill, which is an extra three-fifths (60%) of your original loan. Ouch!
Nevertheless, according to a Moneyfacts poll, almost two in five borrowers (38%) are looking for a mortgage lasting more than 25 years. If you must go down this route, overpay your mortgage whenever you can, either by upping your monthly repayments or throwing lump sums at your loan (but check for any penalties first).
Finally, this news makes me more convinced than ever that the UK no longer has a housing market, it has a housing bubble fuelled by speculation and unrealistic financial optimism. Perhaps 2007 will be the year that this bubble bursts, who can say? On the other hand, I've wrongly called house prices since 2003, so don't please take my word for it!
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