Surging house prices are forcing a growing number of homebuyers to take out loans with terms of 30 years or more, as they seek affordable monthly repayments.
However, borrowers who supersize their mortgage terms are being warned that their overall interest payments will soar.
Although a mortgage term is typically 25 years, a new study revealed that more than a fifth (21 per cent) of homebuyers are searching for 30-plus-year mortgages compared with only 8 per cent a year ago.
Buyers are increasingly looking for ways to hold down the cost of their monthly repayments, in the knowledge that the Bank of England is expected to raise its base rate next year, pushing up the cost of borrowing.
By extending a mortgage term over 30 years instead of 25 years, the monthly repayment on a £300,000 mortgage drops from £1,272 a month to £1,109, a saving of £1,956 over a year. But there is a downside. The average mortgage taken out this summer is £151,668. Over the 30-year term, the monthly repayment on this loan would be £551 a month, £83 cheaper than a 25-year term loan. Yet the total cost of repaying this mortgage over 30 years is £23,297 more than over 25 years, a mark-up of 25 per cent.
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Adrian Anderson, director of the mortgage broker Anderson Harris, says: “The banks are keen to offer long-term mortgages as the repayments are more affordable. As a borrower, you will make many more payments on the loan and so you will pay more in the long run. However, if this is the only way you can afford your mortgage you may consider this a small price to pay.”
Some lenders will allow mortgage terms of up to 40 years, although most have a maximum term of 35 years.
Mark Harris, of the mortgage broker SPF Private Clients, warns that this tactic won’t work for borrowers in later life because lenders won’t approve loans that go beyond retirement. He says: “A 30-year-old taking out a mortgage with a 30-year term should comfortably pay it back by retirement age, whereas a 40-year-old probably won’t, which many lenders will have an issue with.”
The difference between borrowing £151,668 over 35 years compared with 25 years is even greater. This would save £141 in monthly repayments initially, but over the lifetime of the loan a homebuyer would pay an extra £47,707.
Longer terms have also coincided with the reduction in availability of the interest-only mortgage, another trick that was often used to help to reduce monthly repayments.