Mortgage brokers have reported that 30 and 40-year mortgages are now commonplace, particularly among first-time buyers as they contend with sky-high house prices.
Last year, the average price of a home in the UK shot up by 20.4 per cent according to Halifax.
Data from UK Finance has shown that first-time buyer demand for mortgages with terms longer than 35 years have also shot up in the last year.
In February 2022, 8 per cent of all first-time buyer mortgages had a term longer than 35 years. A year later, this had risen to 18 per cent.
By comparison, the demand for 30-35 year mortgages has remained largely unchanged since before the pandemic, with this type of mortgage accounting for 36 per cent of all new home purchases in February 2023.
“35-40 year mortgages are often used to eke out that little bit of extra affordability, whether this is needing to borrow more or to fit within a person's stated budget,” Chris Sykes, technical director at Private Finance Limited explained.
Sykes noted that borrowers typically do not tend to actually keep the mortgage for this period of time and instead it is done as a cash flow exercise with many borrowers hoping to make overpayments to clear the debt faster.
“Whether these [overpayments] materialise is another matter,” Sykes added.
Better suited to particular industries
The industry a borrower works in is also important to consider when it comes to deciding the term of a mortgage.
“The longer the mortgage, the more interest you'll pay over the term so careful consideration should be taken around the term you take. For example, if you are just salaried, with no variable components to income, it might be better to take as short a term as possible.
“Equally, if heavy commission is payable but the mortgage payable is on your base salary, and you are intending to overpay with commission, perhaps a longer term may work well, potentially integrating some interest-only,” Sykes noted.
Another consideration that is likely more front of mind for borrowers is affordability.
“With high interest rates and eye-watering living costs, lender affordability calculations are driving borrowers to take longer term mortgages,” Bob Singh, founder at Chess Mortgages said.
“Most lenders will lend to the age of 70 and, if there is sufficient post-retirement income, then mortgages up to age 95 are available,” he added.
Singh also noted that interest-only mortgages are also becoming more popular with borrowers.
“These provide lower monthly payments to ease affordability and offer the ability to overpay as and when possible within certain annual limits,” he said.
Popularity among older borrowers
Brokers have even reported an uplift in demand for longer-term mortgages from older borrowers as a result of the rising cost of living and higher mortgage interest rates.
“The cost of living has effectively meant that one of the only ways to reduce your outgoings is by increasing the mortgage term,” Gindy Mathoon, a senior mortgage broker at Create Finance said.
“At Create Finance, we are seeing this as a regular trend not only with first-time buyers, but with next-time buyers.
“With older borrowers, we have spoken to some borrowers hoping to use a pension lump sum or inheritance to reduce their mortgage. However, we have been cautious with extending the term past state retirement without a viable repayment strategy, despite the maximum age a lender will use for employed income.”
jane.matthews@ft.com
