(qlmbusinessnews.com Mon. 20th May, 2024) London, UK —
Extended Mortgage Terms: How 35-Year Mortgages Are Becoming the Norm for Young Buyers
Young Homebuyers Struggle with Ultra-Long Mortgages: ‘I Had No Choice But to Get a 35-Year Mortgage'
Young homebuyers are grappling with significant challenges in getting onto and staying on the property ladder.
Nicola Webb, a 34-year-old nurse, felt compelled to opt for an extended mortgage term when purchasing her first home last year. The mortgage, set to conclude when she is 68, was “the only way I could just about afford my mortgage as a single homeowner,” she said.
“I've never experienced lower mortgage rates, so I just accept what it is.”
Despite saving a substantial deposit for her £147,000 two-bedroom flat in Gloucestershire, Nicola's five-year fixed-rate mortgage costs £598 per month—about a third of her monthly income after tax and student loan deductions.
Nicola hopes to reduce her 35-year mortgage term or use any extra disposable income to make overpayments once her student loan is paid off or written off.
She expresses gratitude for being able to enter the housing market at all. Despite the significant portion of her income going towards mortgage payments, she finds it more economical than renting in her area.
“I had no luck with renting… for me, it's all about keeping it as affordable as possible.”
Recent statistics indicate that Nicola's situation is increasingly common. Data from the Bank of England shows that hundreds of thousands of homeowners have taken out mortgages in the past three years that extend into their retirement.
While longer mortgage terms make repayments more manageable in the short term, homeowners ultimately pay more in interest. Industry experts also warn that some buyers might struggle to afford their mortgage after retirement, potentially dipping into their pension savings to pay off their home loan, thereby reducing their retirement funds.
For some, a 35 or 40-year mortgage term is a temporary solution while they wait for mortgage rates to decrease from their current highs.
Martin Tapper, a mortgage broker based in Essex, told the BBC that most of the first-time buyers he advised this year opted for 40-year terms.
“A young family can escape exorbitant rent costs by purchasing a home where the mortgage cost is far cheaper on a longer term,” he explained.
Tapper emphasises that he only recommends longer terms if they suit the client's situation, advising clients to switch to a shorter term later if their income increases or they move home. He also stresses the importance of insurance to cover mortgage payments in case of health issues or job loss.
For 30-year-old Shane Lees, considering an ultra-long mortgage has been a serious decision. He and his partner are remortgaging to buy a three-bedroom house in West Sussex to start a family. After consulting several mortgage brokers, they chose a 35-year mortgage term, planning to reduce it to 25 years after a two-year fixed deal.
Shane noted that they are now less inclined to choose a property at the top end of their budget due to higher monthly repayments. They selected a lender willing to renegotiate at the end of the two-year fixed deal, unlike most offering a 5.5% rate.
The pressure on younger homeowners like Shane is evident, with a sharp increase in the proportion of mortgages extending beyond the state pension age. The number of homeowners under 30 taking out such mortgages more than doubled over two years, while for those under 40, the number rose by 30%.
Sarah Coles, head of personal finance at Hargreaves Lansdown, advises against relying on future interest rate cuts to shorten mortgage terms.
“Economists are frequently adjusting their predictions for when the Bank of England will reduce rates. Early this year, some predicted cuts by March; now, they're expected in the summer. Even then, cuts won't be rapid, so anyone hoping for much lower rates will have a long wait.”
Coles suggests those with 35 or 40-year mortgages need a solid plan to pay it off and a contingency plan for life's “unexpected twists and turns.” For example, if planning to downsize to clear the debt upon retirement, consider what to do if circumstances change and staying in the home becomes preferable.
“It can make mortgages more affordable, but borrowers need to understand the broader implications.”
For homeowners like Shane, the risks are acknowledged, but he feels fortunate to face this challenge in the first place.
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