Some home buyers risk spending thousands of pounds more in interest by taking on longer loans in order to make rising house prices more affordable.
Opting for a deal over a longer term makes it easier to manage financially as borrowers normally pay smaller instalments on their mortgage each month. It is often a tactic first-time buyers employ to stretch lending restrictions to the limit and borrow as much as possible.
According to a Freedom of Information request from wealth manager Quilter, the number of mortgages sold with a 35-year term or longer leapt to a three-year high in March this year. The figure jumped by almost 75pc compared with the same month in 2020, according to the numbers obtained from City watchdog the Financial Conduct Authority.
The increase came as house prices rose at their fastest rate since 2007, ahead of the initial stamp duty holiday deadline planned for the end of March.
As prices accelerated in the second half of last year, annual growth hit 10.2pc by March. The significant shortage of homes propped up inflated prices while buyers scrambled to make the most of the tax break.
Longer mortgages not without risk
Charlotte Nixon of Quilter says the manic market and huge price increases forced borrowers to agree to longer mortgage deals in order to afford home purchases. For some, she adds, especially first-time buyers, obtaining a mortgage with a 35-year term or longer was the only way to buy a property, thanks to the lower monthly repayments.
Although the average mortgage term is generally around 25 years, brokers say this has been changing. The appetite for long-term mortgages was already increasing before the pandemic due to the general trend of rising house prices.
Yet these deals are not entirely without risk. One of the greatest drawbacks of acquiring a mortgage of 35 years is that the longer the mortgage term, the older the borrower will be when making the final repayment, according to Ms Nixon. Which means that mortgagors would likely be repaying beyond their retirement age. Although some lenders permit this, it could have an adverse effect on a person’s standard of living, with many becoming unable to afford repayments comfortably.
A longer mortgage also means paying more interest, so that the overall cost of the loan increases in comparison with a shorter deal. For example, on a £175,000 mortgage at a rate of 3pc, a 25-year term would cost repayments of £830 per month, with a total bill of £249,000, of which £76,000 is interest. For a 30-year term, the monthly repayments fall to £738, but the total bill would be £16,500 higher because more interest is incurred.
However, some long-term mortgages allow for overpayments, which could make repayments past retirement age more manageable and would also reduce the amount of interest paid over the length of the term, said Ms Nixon.
House prices now 8.5 times average salary
The effect of the house price boom has been to push affordability in the UK to a record low and further segregate first-time buyers who were by and large locked out of the mortgage market by risk-averse lenders for much of last year.
According to analysis by lender Halifax, buyers now must spend 8.5 times the average salary to afford a property.
Mark Hosker, of mortgage broker Cyborg Finance, says his firm is seeing many more longer-term mortgages, which reflects the new reality of home ownership. Buying with a long-term mortgage also satisfies lenders’ affordability tests, which have become increasingly stringent in the last decade.
Colin Bell of Perenna, a mortgage lender, believes choosing a longer repayment period can mean paying thousands more in interest over the lifetime of the loan, an approach that is merely papering over the cracks of a wider issue in the UK mortgage market. There is a need, he says, to improve housing supply in the UK to better control house price increases, but also change the way that homes are financed.
Perenna is launching a 30-year fixed-rate mortgage to lock in low rates, which would allow borrowers to switch after five years, with no extra charges.