FINANCE
Buckinghamshire Building Society at 6.29% for three-year discounted family assist mortgages. REDUCING THE TERM While a 40-year term may help you get a foot on the ladder, and many mainstream lenders will allow you to take out a mortgage that you will still be repaying when you’re 75 or even older, it makes sense to see it as a temporary measure. Paying a mortgage into your 70s would mean either working well beyond retirement age (which may not be possible) or paying enough into a pension to fund it (probably not affordable). One of the best things you can do to reduce your mortgage term is to choose a mortgage with flexibility and overpay when you can. For example,Virgin Money’s online overpayment tool shows that if you paid a modest £100 extra a month, its 40-year mortgage would become a 33-year mortgage, with borrowers allowed to repay up to 10% of the outstanding balance each year without any charges.You could also consider putting money aside, so that in time you can remortgage for a shorter term. EVEN LONGER? Now that 40-year mortgages are becoming mainstream, will terms extend yet further? Just before he left office in 2022, Boris Johnson was exploring the idea of allowing 50-year mortgages that could pass between generations, similar to the Japanese 100-year mortgages that became popular in the 1980s before Japan’s overheated housing market collapsed. In Sweden, 50-year terms are commonplace, although householders can take loans of up to 105 years (reduced from 140 years in 2016). In fact, The Guinness World Record for the longest mortgage ever taken goes to a Swedish couple who, in 2012, signed a mortgage agreement that would last 145 years. A spokesperson for Perenna told First Time Buyer, “We’ve found that 40 years is more than enough for people to secure the loan size they need to secure a house in the current market. If, however, a need arises for a 50-year product, consumers can rest assured that we will consider providing this.”
says, “The number of people opting for longer term mortgages has caused concern at the Financial Conduct Authority. The worry is that some borrowers haven’t fully understood the potential impact 30- to 40-year mortgages could have on their long-term finances. Not only will borrowers be paying much more in the long term, but they are also taking funds away from their retirements.” So, given the obvious drawback, are these marathon mortgages worth considering? If you are able to manage a standard term mortgage on a home suitable for your needs then there’s no reason to consider it – although it could be useful down the line if your financial circumstances deteriorated or interest rates rose to a level where you were struggling. In these circumstances most lenders would consider extending the term to make your repayments easier. If you are successfully saving and nearing your goal, while house prices are relatively stable it might be more sensible to keep saving for a few months more. However, if you are paying extortionate private rental costs that make it hard to save, then a longer-term mortgage might bring your own home within reach, without costing you much more a month. WHAT IS AVAILABLE? The monthly interest rates on these longer terms are generally no higher than for a standard length, and 90% LTV mortgages are widely available. At the time of writing, some of the best rates for 90% LTV five- year fixes over 40 years were from Halifax (4.64%) Virgin Money (4.65%) and The Cumberland (4.67%). Most of the top deals have high fees (up to £1,595) but Halifax also offers a five-year fix with just a £100 fee at 4.75%. For those who want to borrow as much as they can, Perenna offers 40-year loans of up to six times income, with the interest rate fixed for the whole term – 90% LTV 5.99% with a fee or 6.13% without a fee. A smaller number of lenders offer 95% LTV over 40 years, starting from 4.79% with The Family Building Society, while for those who have parents who can help out, there are several 100% mortgages available over 40 years, with Mansfield Building Society topping the table at 5.89% and
EXPERT COMMENT
Longer mortgage terms provide borrowers with a means to mitigate the impact of rising interest rates, offering them greater nancial stability and affordability over time and reduced monthly expenses. In addition, homeownership is made more accessible for FTBs who may have lower incomes. Thus, a 40- year mortgage can be a practical way to enter homeownership without overextending their nances. However, a longer mortgage term entails higher overall costs, as borrowers accrue interest on the loan for an extended duration. This can result in substantially higher interest expenses compared to shorter-term mortgages. In addition, the rate at which homeowners build equity in their property will be slower, making it less attractive for those who aim to build equity and wealth through property ownership. Extending a mortgage into retirement can also signi cantly impact one’s nancial future. The longer the mortgage commitment extends into retirement, the greater the potential risk to nancial stability in later years. Whether a 40-year mortgage term is good for you depends on your speci c nancial circumstances, goals, and preferences. Use an online mortgage calculator to help you evaluate the trade-offs between lower monthly payments and higher overall interest costs and, more importantly, get in touch with a mortgage adviser.
Nicola Schutrups, Managing Director, The Mortgage Hut
First Time Buyer April/May 2024 87
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