One in six borrowers is taking out a mortgage lasting 35 years or more, meaning that many will be paying off their loans well into their 70s.
Figures from The Bank of England show that during the first three months of this year, 15.75% of all new mortgages were for terms of 35 years or more. This is a huge increase from 2005, when just 2.7% of mortgages were for spread over such a long period.
It’s believed a multitude of economical changes are responsible. With house prices on the rise and wages struggling to keep up, many people are buying homes with small deposits. Since the most generous interest rates are reserved for those with a large down payment, many people are choosing long repayment terms in a bid to keep their monthly outgoings as low as possible.
For example, someone taking out a mortgage to buy a £200,000 house could expect to pay upwards of £809 a month if they go for a 25-year-term, while those who stretch the loan out for 40 years will pay just £596 a month.
Although longer terms may seem much more affordable, they tend to see borrowers paying more interest over the course of their mortgage. In some cases, these long term loans can work out thousands of pounds more expensive than those over a more traditional period of 25 years.
Nevertheless, long term mortgages can offer an element of flexibility to some. By keeping monthly repayments low, homeowners can free up cash to be directed towards savings accounts.
Most mortgage products allow borrowers to overpay up to 10% of the property’s value each year. As a result, many people choose 30-35 year mortgages only to overpay anyway in a bid to reduce the amount of interest owed and become mortgage-free earlier. Although this may sound counterproductive, it means that homeowners have the flexibility to pay a low and affordable amount when necessary and pay more when possible.
Homeowners can also remortgage their properties at a later date if their income changes. It’s often possible to reduce the term of the mortgage so that it can be paid off much sooner.
If you’d like help finding the right mortgage for you or you’d like to remortgage your property to improve your finances, please get in touch with the team at TaylorMade.
