First time buyers opting for long mortgage terms
By the end of 2023, almost one in five first time buyers were borrowing with a term of over 35 years, according to trade body UK Finance, compared with fewer than one in ten the previous year.
Although inflation is gradually easing, living costs remain high, making affordability an issue for those wanting to get onto the property ladder.
Eric Leenders, Managing Director of Personal Finance at UK Finance, said, “2023 was a tough year for UK households and we expect to see continued challenges in 2024.
Affordability remains a barrier to home ownership, but pressures should start to ease gradually through this year and next.”Pros and cons of longer mortgage termsThe biggest benefit of taking out a mortgage over 35 years or longer is that your monthly payments will be lower than if you opt for a shorter term.
For example, someone borrowing £150,000 over 35 years on a repayment basis at a rate of 4.5% would pay £710 a month for their mortgage, but these payments would increase to £834 a month if they opted for a shorter 25-year term. Although monthly payments will cost less the longer the mortgage term you choose, the downside is that you could end up paying significantly more back in interest overall.
Based on the same example above, repaying a £150,000 mortgage over 35 years would set you back a total of £298,152, but £250,125 if the mortgage term was reduced to 25 years.
That’s a difference of nearly £50,000 which could make a huge difference to your long-term finances.
Another drawback is that a very long mortgage term could affect your retirement plans and may mean you have to work for longer than you’d planned to. However, for many first time buyers, choosing the maximum mortgage term possible will be the only way to make getting onto the property ladder affordable, which means longer term mortgages having an important role to play.
That said, if you’re considering a longer mortgage term, it’s a good idea to review your term each time you come to the end of a deal.
If your income has increased, you could look to either reduce your term or overpay your mortgage so you can clear your mortgage earlier and reduce the overall amount you’ll repay.
