The number of borrowers taking out mortgages of 35 years or more has reached its highest level since the 2011 recession, according to data from the Financial Conduct Authority.
According to a Freedom of Information request, 28,310 mortgages of 35 years or more were approved in 2017, showing a 27% rise from the year before.
Why are so many people opting for longer mortgages?
Longer mortgages are becoming increasingly popular, perhaps in part due to rising property prices teamed with wages showing little growth.
With properties becoming more expensive, it’s more difficult than ever for home buyers to access the mortgages they need - particularly if they’re a first time buyer.
When a lender assesses whether or not to approve a mortgage application, one of their key considerations is the potential borrower’s ability to make repayments on time.
If the lender suspects the mortgage is unaffordable, the application will often be rejected.
However, one way to overcome this issue is by spreading the mortgage debt over a longer period of time. By spreading the loan over 35 years rather than a more traditional term of 25 years, repayments will become more manageable and the buyer’s monthly outgoings will be lower.
What are the downsides of 35-year mortgages?
Although 35 year mortgages may make monthly repayments more manageable, the total cost of the mortgage will be higher than if the buyer was to opt for a shorter term.
This is because interest is accrued over a longer period of time and therefore more interest will be paid in total.
For example, if a home buyer was to borrow £130,000 over 25 years at an interest rate of 3.5%, they’d repay £651 a month and £195,311 overall.
If, however, the home buyer borrowed the same amount over 35 years, their repayments would drop to £538 a month but they’d repay £225,757 overall.
Not only do long term mortgages leave homeowners paying more interest, they can also cause problems if the homeowner’s financial circumstances change in the future.
How can homeowners reduce their mortgage term?
Thankfully, a long mortgage term can be reduced if a homeowner’s financial circumstances improve. For example, some home buyers on modest incomes opt for a long mortgage term so that their application will be approved, only to make regular overpayments in order to bring their amount of debt down and pay off the loan faster.
Another option involves remortgaging the property. By remortgaging, homeowners can reduce their mortgage term and save thousands of pounds in interest in the process. In order to remortgage, homeowners will often have had to build up a substantial amount of equity in the property since they originally secure their mortgage.
