Residential 

Most mortgages now have 40-year terms

Most mortgages now have 40-year terms

More than half of all residential mortgage products now have a standard maximum mortgage term of 40 years, new research shows.

Latest data from Moneyfacts showed consumers can now sign up to 2,744 mortgage policies that last for 40 years — 55 per cent of the whole residential market.

Just five years ago, only two fifths of policies on the market allowed a consumer to sign up to a 40-year deal.

Matching the trend, the number of policies with a shorter maximum term of 25-years has decreased from nearly 7 per cent of the market in 2014 to less than 3 per cent in May of this year.

Those with a maximum of 30 years has dropped from 13 per cent of the market to 3 per cent over the same period, while those with a 35 year max stayed consistent at about 38 per cent.

Darren Cook, finance expert at Moneyfacts, said: “In the past, a standard term of a mortgage generally amounted to a period of 25 years, but most products are now available for a period of 40 years. 

“By extending their mortgage term, borrowers can reduce their monthly repayments and therefore are more likely to meet strict affordability requirements.”

Mr Cook added that although a longer mortgage term could reduce monthly repayments, the additional interest that accumulates over the extended term could be considerable.

For example, a £200,000 repayment mortgage at a rate of 2.5 per cent over 25 years equates to a monthly repayment of £897.23 and total interest payable would be £69,169 over the term. 

The same mortgage taken over a 40-year term would reduce the monthly repayments to £659.56 but increase the total interest to be paid to £116,588, resulting in an additional £47,419 in interest.

Commenting on the findings, David Hollingworth, director at L&C Mortgages, said there was no doubt that more mortgages were being taken out over longer terms.

He said: “This is particularly true of first-time buyers as they look to keep their monthly payments lower to give some breathing space in their monthly budgeting and help deal with affordability issues.

“As a result, more lenders have edged up their maximum term to keep in line with the competition and that inevitably drives up the number of products that are now available at longer maximum terms.”

Mr Hollingworth added it was important borrowers understood the downside of a longer term mortgage and were aware of the extra interest, but noted that those who initially structured their mortgage over a longer term could still consider overpaying and reducing the term over time.

imogen.tew@ft.com

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