40-Year Mortgages – Home Or Retirement

40-Year Mortgages - Home Or Retirement
A recently released study has shown that more buyers are taking out 30 or 40-year mortgages, which The National Association of Property Buyers (NAPB) claims is fuelling the rise in house prices.

Traditionally, mortgages have a 20 or 25 year term, however, mortgages with a 30 or 40-year term are becoming more common. According to research by Moneyfacts, six out of 10 lenders offer 40-year mortgages.

And more and more buyers in their 30s or 40s feel the need to take out a longer-term mortgage in order to afford the home they want.

Why 40-Year Mortgages?

The longer the term of a mortgage, the lower the monthly repayments, because the borrowed sum is paid back over a longer period. By extending the term of the mortgage, a buyer is able to afford a home at a higher price.

If a buyer wants to buy a property for £150,000 using a mortgage at a rate of 2%, they will have monthly repayments of £635.78 with a mortgage over 25 years. With a 40-year mortgage, the monthly payments will decrease by £181.54.

A longer term does reduce the monthly payments considerably. However, by adding 15 years to the mortgage, the buyer will pay more interest on the amount borrowed. This means, instead of paying £40,735 in interest over 25 years, they will pay £68,035.

While these longer-term mortgages allow more people to afford the home they want, this will also drive up house prices further.

Much like the ultra-low interest rates we’ve enjoyed for the last few years, long term mortgages are making property that bit more affordable for people, spreading repayment of the debt over 30 or even 40 years. Whilst this is helping people to afford their ideal home, it is further fuelling price rises and creating an issue for the future.

Jonathan Rolande, The National Association of Property Buyers

Most high-street lenders now offer longer-term mortgages. Halifax, Barclays, Santander and Nationwide offer a 40-year mortgage. NatWest and Virgin Money offer a 35-year term.

Why Do More Buyers Feel Forced Into Taking Out Longer-Term Mortgages?

One reason is the sharp rise in property prices in the past two years. This has made it even more difficult for first-time buyers to get onto the property ladder.

While many were able to save more money for a bigger deposit, due to the lockdown restrictions, the hike in energy and fuel costs and the rise in the cost of living, tax increases and rise in inflation are all putting pressure on household budegts.

The combination of smaller household budgets and higher property prices make a 40-year mortgage seem like the only way to buy a house.

What’s The Problem With Longer-Term Mortgages?

Apart from driving up property prices, which will only exacerbate the problem and force more people to go with 30 or 40-year mortgages. Mortgages with such long terms, will also cause problems in the future for buyers.

Most first-time buyers are now in their 30s. With a 40-year mortgage, they will have to work until they are in their 70s to repay their mortgage. Or they have to sell their home to be able to retire earlier.

Retirement or home will be a decision many people will face, if they take out a mortgage with a 30 or 40-year term.

As a result, it is expected that the number of older people renting will increase sharply. Research by Paragon Bank shows that by 2035, half of all people who rent will be 45 or over. Currently, one in three people living in rented accommodation is 45 or over.

Pensioners who are renting, need to take the extra cost into consideration and could struggle.

Continuing to pay rent in retirement will be a burden on their finances, especially with pension incomes already squeezed. If you rent for life, you need to consider the toll this will take on your pension and make sure you’re building up enough savings to cover it. It’s going to be tough for many.

Amy Norman, Senior Researcher at The Social Market Foundation

While the likelihood is that the value of the property will be considerably higher than when it was bought, there is no guarantee.

Making Overpayments Where Possible

One way to counteract the negatives of 40-year mortgages is to make overpayments, whenever possible. This will reduce the term eventually, however, this will only be possible if your mortgage allows you to make overpayments.

The earlier a buyer can start to make overpayments and the higher they are, the quicker the term will be reduced.

Taking on 30 or 40-year mortgages should be carefully considered, as while it might be the solution for the present, in the future, it will cause a lot of issues.

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