Mortgages are traditionally taken out over 25 years, 30 years at a push – but house prices have got so high that many would be homeowners have found themselves completely unable to get on the property ladder.
Mortgage lenders have found a solution – offer a mortgage over a longer term so borrowers can afford the repayments. The catch is – the borrower pays a lot more in the long run, and the lender’s profits increase exponentially!
However, for many, it is the only way they can afford to buy a house. One couple opted for a 35-year mortgage with Northern Rock. Mr A is 36 years old, so the mortgage won’t come to an end until he is past retirement age. However, he has an optimistic viewpoint, and believes that his working situation will improve in the meantime, therefore allowing them to pay the mortgage off far earlier. It’s a gamble, but most people can safely assume that their earnings will increase as their career progresses.
For example, a mortgage of £200,000 over 25 years on a 2 year tracker mortgage (initial rate 4.79% rising to 6.5% standard variable) will cost £1,140 a month for the first 2 years, £1,329 from then on.
Take that same mortgage over 40 years instead, and the monthly rate after the initial 2 years is £1,157 – a total of £172 less a month, and around £2,000 less a year. However, the total cost that you pay back is quite different. With the 25-year mortgage, you’ll pay £394,241 in total. Over 40 years, you’ll pay £549,931 – a difference of £150,000. You could buy another house with that!
It’s very important that people that opt for the longer term mortgage in order to get onto the property ladder do take steps to remortgage and shorten the term as soon as possible. Making frequent overpayments would also help considerably. The worst case scenario is that you enter your pension years, still having to pay off the mortgage. With the future of pensions also in an uncertain state, it’s definitely not a gamble worth taking lightly.
A spokesman from Mortgage Advice Bureau, Brian Murphy, says, “Stretching a mortgage term to lower the payments is a risky business. We always advise clients to keep repayments to as short a term as possible, to enable them to free up money for pre-retirement investments.”
As long as the borrower is savvy and is well aware of the risks, and has every intention of turning the situation around, then it’s not necessarily a bad thing. It’s the borrowers that do not have the financial sense to realise the risks that could fall foul.
At the moment, a number of lenders including Northern Rock and Cheltenham & Gloucester, go up to 35 years. HSBC, Halifax, Ulster Bank and Coventry Building Society offer 40 years mortgages. Bradford & Bingley have trumped the competition with a 45 year offering, however it is very much targeted at young professionals, accountants for example, whose salaries are guaranteed to increase substantially, at which point they can remortgage and make higher monthly repayments over a shorter term.
According to Northern Rock, the average lifespan of a mortgage product is between 3 and 5 years, so prospective borrowers take note – a mortgage isn’t for life. It’s until a better offer comes along, and as long as you keep your eyes open, you should always be able to find a better deal.
Before choosing to get a longer mortgage term, chat it through with a specialist broker. There are plenty of no-obligation brokers, available through the internet, that will be able to give you professional advice, and help you find the best deal at the same time!