Borrowers are increasingly going for longer mortgage terms in order to keep their monthly repayments lower. But is it a good idea?
Mortgage borrowers are increasingly turning to longer-term loans in order to cut the size of their monthly repayments, it has emerged.
According to a report from Halifax, more than a quarter of first-time buyers are currently opting for mortgage terms of 35 years. Traditionally most buyers opted for a 25-year mortgage term – but this isn’t necessarily the norm anymore.
In 2007 the proportion of first-time buyers taking up a 35-year mortgage stood at 16%. But by 2015 this figure had grown to more than one in four (26%). Over the same period, the share of mortgages with a 20- to 25-year term dropped from 48% to 30%.
But is a longer-term mortgage a good idea?
Will you be eligible?
In theory most lenders will consider applications for longer than normal mortgage terms, but some will have a maximum term.
Typically Natwest and Virgin will agree to 35-year terms, while Halifax and Nationwide and some of the smaller building societies such as Ipswich and Nottingham will offer 40-year terms.
Applicants looking for a longer term mortgage can simply request their desired term when they apply for a mortgage, either directly with a lender or through a broker.
[SPOTLIGHT]The main barrier to being approved for a 35-year mortgage is the borrower’s age – lenders don’t like mortgages to stretch into retirement, so most will have a limit on the age a borrower can be at the end of the term. The majority set the limit at 65, although building societies are more likely than banks to consider loans running until the age of 75.
So, a 25-year-old borrower should have little problem being approved for a 35-year mortgage as they will be 60 at the end of the term. A 40-year-old applicant, on the other hand, may find their options limited as they will be 75 at the end of the term.
Affordability
The main advantage to a 35-year mortgage is lower monthly repayments.
For example, someone borrowing £200,000 over 25 years at 3% would pay £948 a month. However, if they opted for a 35-year term the monthly payment would drop to £770. A 40-year mortgage would see the figure drop further to £716 a month.
In some cases the longer-term would satisfy the lender that the applicant could afford the mortgage, while in others it may allow them to borrow more money.
Many first-timer buyers will have little choice than to opt for a mortgage term of 35 years or more. High houses prices in some areas mean it will be the only way they can afford to get on the housing ladder.
Higher interest bill
The main sting in the tail to longer term mortgages is a bigger interest bill overall, as you will be paying interest on the capital borrowed for a longer time period.
A £200,000 mortgage at 3% repaid over 25 years would incur a total interest bill of about £84,500. But extending the term to 35 years would see this figure jump to £123,000, about £38,000 more.
Extending the term to 40 years would mean a total interest bill of almost £144,000, nearly £60,000 more than the 25-year term.
That’s a lot of money that could be spent on other things – general living expenses, holidays, cars, or saving for retirement.
Flexibility
However, a higher interest bill shouldn’t necessarily put you off a longer-term mortgage as you could reduce the term later on if your circumstances have changed.
For example, when the time comes to remortgage in a few years’ time you can reduce the term to 25 years or, in fact, any term you choose.
If your property has risen in value over the first few years of ownership you’re likely to find you have a better choice of mortgage deals when you remortgage as the loan-to-value (LTV, the percentage of the property's value you need to borrow) will be lower.
For example, a first-time buyer can currently get a 2.39% two-year fix with Marsden Building Society with a 10% deposit.
But someone with 20% equity in their property would be eligible for better rates. Nottingham Building Society is currently offering a 2.19% three-year fixed rate for remortgagers at 80% LTV.
Many mortgages also give borrowers the option to overpay and reduce their mortgage term. You might want to overpay if you get a pay rise or an unexpected windfall. However, check the terms and conditions of your mortgage first as there may be limits on penalty-free overpayments.
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