Borrowers are opting for longer-term mortgages in the face of rising house prices. The number of borrowers taking mortgages for longer than the standard 25 years is said to be increasing. A survey carried out by YouGov on behalf of the HomeOwners Alliance and myhomemove, reveals the range of options chosen by homeowners in order to get themselves onto the housing ladder.
The Chart shows 28 per cent of young homeowners – those aged between 25 and 34 – have chosen to extend their mortgage beyond 25 years in order to purchase their main home.
The trend is understandable. Most indices suggest the upward momentum of prices will continue in the face of housing shortages. The Office for National Statistics reports that prices were up 10.2 per cent over the year to June 2014. Of course London and the southeast contributed
the most to that increase – prices in London have risen 19.3 per cent.
The loss of lower cost routes to homeownership, such as interest-only loans for example, coupled with stricter affordability criteria and stress tests of the MMR, let alone low wage inflation, are pushing borrowers even more towards longer mortgage terms.
Aspirations
Moreover, all the indications are that buying a home of one’s own remains high on the list of aspirations for many in the UK. The same survey found that 68 per cent of non-homeowners would like to own a home in the future.
The trend has led to a warning from Andrew Bailey, deputy governor at the Bank of England, who has expressed alarm at the prospect of more borrowers opting for longer mortgage terms, particularly the idea of people carrying their mortgages into retirement. He has a point as the high prices mean that first time buyers are older than they used to be, giving them less time to pay off a mortgage.
The interest-only saga is indicative of what can happen. Although moves have been made to tackle the issue, there are still many older borrowers with their heads in the sand, entering retirement with interest-only mortgages and no visible means of repaying the outstanding capital. On the other hand, at least with extended mortgage terms, provided borrowers maintain their payments, the mortgage will be paid off eventually.
The trend is clearly towards people having to work longer and retire later. The number of over 60s in the workforce is beginning to grow as many find they need to supplement their pensions or that they cannot afford to retire. It seems likely that standard mortgage terms will have to adjust to accommodate older borrowers.
Appropriate borrowing
Lenders are willing to lend over terms longer than 25 years, provided all the other criteria are met. Leeds Building Society, for example, will lend for up to 35 years. Its head of corporate communications, Gary Brook, says, “The main issue is can they afford the commitment over that period? We just need to make sure it’s appropriate for the borrower at that time.”
By opting for mortgages of extended terms, borrowers are effectively committing themselves to paying more for their borrowing. They are gambling on house prices continuing to rise, so that their equity appreciates, and there is no sudden fall in their income or a high rise in interest rates. Of course, provided conditions remain benign, and they are able to maintain their payments, monthly costs would fall as more of the capital was paid off. But that surely is the mindset for everyone taking out a mortgage, otherwise no borrower would venture into the housing market.
Most borrowers expect to remortgage at the end of their short-term deal and that at some later date they will be in a position to remortgage on more favourable terms, shortening the loan period.
Whether this is likely to become an established trend in the housing and mortgage market is difficult to say. But in a market in which prices are rising, borrowers are going to be more willing to get themselves into debt, and potentially overstretch themselves, for the sake of what is already considered a valuable commodity.
Recent market studies suggest that very modest rises in interest rates could cause affordability pressures for a significant minority of mortgaged households. However, this mostly concerns pre-crisis and pre-MMR borrowers with high loans to value and high loans to income. Surely the presence of the new stricter criteria of the MMR regime should mean that extended mortgage terms would not be the start of the next great mortgage scandal? Ultimately houses are for living in, not investment. But even if they turn out to be a poor investment, most people would prefer to pay a mortgage rather than rent.
