For many years, the ‘standard’ mortgage term for many borrowers has been about 25 years. However, in recent years there has been a marked trend towards longer mortgage terms, sometimes up to 35 or even 40 years. What are the long-term implications of taking out a mortgage for longer and why would you want to do it?
Why are first time buyers taking out mortgages for 35 or 40 years?
Many first time buyers are opting for a 40-year mortgage at the outset as a more affordable means of getting on the housing ladder. Put simply, the longer the mortgage term, the lower the monthly repayment – meaning that many first time buyers are relying on this to pass their lender’s affordability check when applying for a mortgage. This is particularly prevalent in and around London and the South East, where property prices have increased dramatically and shut many potential buyers out of the market.
Assuming an average interest rate of 2.5%, a mortgage of £150,000 paid over 25 years would require monthly repayments of £672.93, with the total interest paid averaging just under £52,000. The same mortgage paid over 40 years would require repayments of £494.67 – almost £180 less per month, but the total interest paid would rocket up to more than £87,000.
However, this approach is no silver bullet to those looking to get on the housing ladder quickly. It’s worth bearing in mind that longer-term mortgages require much more interest to be repaid and applicants seeking a longer term on their mortgage should be aware of the increased costs – it may be more financially sensible to wait a few more years and build up a bigger mortgage deposit to avoid paying more in interest.
Of course, borrowers may also be able to reduce their mortgage loan by making lump sum or regular overpayments (if the mortgage allows) or by remortgaging and opting for a shorter term if they are better equipped for an increase in their monthly repayments.
Aside from first time buyers, there is another key group of borrowers taking advantage of longer-term mortgages; borrowers in later life or in retirement.
40 year mortgages for later life borrowers
Some mortgage lenders such as Ipswich Building Society have no maximum age limit on their mortgages, meaning that an applicant in their 70s, 80s or 90s could be successful in getting a mortgage if they pass the affordability checks.
It may be that a retired applicant owns their own home and wants to release some equity from their property to make a large purchase, fund home improvements or gift a deposit to a family member. If affordability allows, they could take out an interest-only mortgage on a 40-year term; so long as there is an acceptable repayment strategy in place such as the eventual sale of the property to repay the loan.
Another option might be a Retirement Interest Only or RIO mortgage, which allows a borrower to release cash from their property and simply service the interest repayments until the last remaining borrower dies or moves into long-term care. Again, at this point the loan is repaid from the sale of the property. RIO differs however in that it does not have a set end date.
Where to go next if you’re considering a longer mortgage term
At Ipswich Building Society we offer free mortgage advice through our team of professional, qualified mortgage consultants. For a no-obligation chat about your circumstances or to see what we may be able to offer you, give us a call on 0330 123 0773.
For more information on mortgages in later life, click here to view our handy booklet.