"The main benefit of borrowing over an extended period is that it aids affordability, but at what cost? A longer mortgage term may mean you can meet otherwise out-of-reach lender affordability criteria and get onto the property ladder sooner, but you’ll pay more interest overall, the longer the term"
Uswitch mortgage expert, Kellie Steed, explored why 30-40 year mortgage terms - nicknamed ‘mammoth mortgages’ - have become much more popular in recent years, and whether or not they are a good or bad idea for prospective homeowners.
It’s a tough old road for today’s first-time buyers, with house prices and mortgage interest rates much higher than they were as recently as three years ago. Whereas the parents and grandparents of the aptly named ‘generation rent’ enjoyed maximum mortgage terms of 25 years or less, a worrying trend faces those lucky enough to become a homeowner.
40-year mortgages, according to UK Finance, have seen a dramatic increase over the past two years. In February 2022 8% of all first-time buyers opted for a mortgage term of 35 years or more. By February of this year, that figure had risen to 18%. Meanwhile, 38% of all mortgage applicants opt for a 30-35 year mortgage term.
This is a clear sign of the times, and with most brokers blaming affordability for the struggles of today’s first-time buyers, it’s no surprise that lenders are beginning to adjust their terms accordingly. In fact, according to Moneyfacts, 67% of all mortgage products currently available have a standard maximum term of up to 40 years.
How first-time buyers are affected
According to the Office for National Statistics, earnings have doubled since 1997, whereas house prices have increased four-and-a-half times. Although first-time buyers are older than they were in past decades, with an average age of 33, they are still typically younger adults that won’t necessarily have reached their peak salary.
With the average UK property currently costing £288,000, a full-time employee on an average salary would need to borrow eight times their annual income to afford one. As most lenders cap their loan-to-income ratio at 4-5%, this leaves a massive income shortfall for today’s first-time buyers.
To meet lender affordability criteria first-time borrowers will therefore need a very large deposit or a very long time to repay the loan. With the cost of living crisis squeezing everyday finances and making saving a large deposit even more difficult to achieve, a longer mortgage term is the only option for many.
According to Primis, the UK's second-largest mortgage network, borrower affordability issues dominate the queries they receive from the brokers in their network. They also report a significant increase in joint borrowers sole proprietor and guarantor mortgages, both of which are products aimed at letting family and friends help (predominantly) first-time buyers meet lender affordability criteria.
Of course, not every first-time buyer has access to help from loved ones, and with no replacement for the help-to-buy scheme across most of the UK, extending the loan term is understandably appealing.
Whether or not a 40-year mortgage term is the right choice for you depends on a number of factors, but overall, the shorter the mortgage term you can afford, the better.
Top tips for those considering mortgage terms of 30-40 years
A 40-year mortgage term may be beneficial in certain circumstances: If you’re expecting to receive an inheritance in the future, or you’re in a career with definite substantial pay increases, such as a junior doctor, a longer mortgage term could help you lower the initial monthly repayments until you receive a windfall. You could then use future income to reduce the term, by paying off a lump sum of the loan or increasing your monthly repayments as and when you can afford to.
There may be an easier way to meet mortgage affordability criteria: Although they should be approached with caution, joint borrower sole proprietor mortgages allow you to use the income of willing family members or friends alongside your own to help you meet your loan repayments, while you retain full ownership of the property. You could also consider buying jointly with family and friends - some lenders allow up to four people to buy a property together.
Use the shared-ownership scheme to buy a home in stages: If you’re keen to get on the property ladder, you could consider buying your home in stages. The shared ownership scheme allows you to buy as little as 10% of a property and rent the remaining portion from a housing association. You can then - in most cases - increase your ownership up to 100% in stages, when you can afford to do so.
Kellie Steed, of Uswitch mortgages, comments:
“The main benefit of borrowing over an extended period is that it aids affordability, but at what cost? A longer mortgage term may mean you can meet otherwise out-of-reach lender affordability criteria and get onto the property ladder sooner, but you’ll pay more interest overall, the longer the term.
“For example £150,000 capital repayment mortgage at 4% interest would result in £87,528 in interest payments over a 25-year term. At 35 years this jumps to £129,000 of interest and at 40 years £150,917 - more than the original mortgage value.
“A longer-term could potentially also enable you to borrow more, meaning you could use a smaller deposit, but equity in your home will grow more slowly when you’re repaying the loan more slowly. This puts you at greater risk of falling into negative equity (where you owe more than your home is worth), especially if you’ve used a lower deposit.
“Some existing mortgage customers extend the term of their mortgage to reduce their monthly outgoings, something that’s bound to have crossed many minds during the cost of living crisis. However, for many borrowers extending their mortgage term of 40 years will mean their mortgage repayments will carry on way into retirement when funds can be even tighter.”