Are 40 year mortgages the ‘new normal’?

More than half the mortgage products available in the UK can now be taken out for 40 years instead of the historic lifespan of 25 years.

The financial website Moneyfacts says 51% of all mortgages are now offered over 40 years, up from just 37% five years ago.

Affordable

It blames higher house prices for the change because of the need to extend the length of the loan to keep repayments down to an affordable level following the tougher affordability rules introduced by the Mortgage Market Review (MMR) in 2014.

Recent research by Santander showed that more than 3 million extra first-time buyers would be able to get on the first rung of the property ladder if they opted for a 40 year term.

Two-edged sword

But experts warn that opting for a longer term deal can be a two-edged sword with borrowers signing up for short term affordability with the consequence of paying much more interest in the long run.

Difficulties in saving for a deposit has meant that the average age of the first-time buyer has risen above 30 so borrowers can look forward to repaying their loan well into their 70s and possibly into their 80s.

Standard mortgage

Darren Cook of Moneyfacts said: “Historically, a standard mortgage term generally amounted to a period of 25 years, but most products are now available to be extended for a period of 40 years.

“By extending their mortgage term, borrowers may be looking to reduce their monthly repayments and therefore are more likely to meet strict affordability requirements.

Not only are the number of mortgages at a maximum term of 40 years increasing, but the number of products at max 25-year terms and 30-year terms are decreasing.

Additional interest

“A longer-term mortgage may reduce the monthly repayments of a mortgage, however, the additional interest that accumulates over an extended mortgage term could be considerable.

“A £200,000 repayment mortgage at a rate of 2.5% over 25 years equates to a monthly repayment of £897.23 and total interest payable would be £69,169 over the term.

“However, the same mortgage taken over a 40-year term would reduce the monthly repayments down to £659.56, but increase the total interest to be paid to £116,588 – an additional £47,419.”

Big risks

Personal finance specialist Becky O’Connor said: “There are big risks to having secured borrowing in your name once you are past a certain age, not least the risk of health problems that prevent you from working, or the need to stop working to care for relatives.

“To spare yourself stress in later life, it is worth keeping your repayments as high as you can afford early on in the mortgage term. Paying off as much of your mortgage as you can in the early days will reap dividends later on.”