It is a common misconception that mortgages are limited to a 25 year repayment period, but this could not be further from the truth as there is now a growing trend towards longer repayment terms – some as long as 40 years.
According to the Council of Mortgage Lenders (CML), the number of individuals opting for loans with a repayment term above 25 years has doubled over the past five years, from 16% in 2009 to 32% in the third quarter of 2014. Further insight shows that during 2014, borrowers aged 30 or under accounted for nearly 60% of all mortgages with a loan term greater than 25 years.
As part of the Mortgage Market Review (MMR), and due to ever increasing house prices and the gap left by the reduction of interest-only mortgages, it was felt it was necessary to allow people to extend mortgage terms. Whilst such a long term mortgage bares similarities to an interest-only mortgage, it can be argued that a 30 or 35 year mortgage could be deemed better since you are paying off the capital, albeit more slowly.
The market has had a mixed reaction to longer mortgage terms, with many mortgage advisors divided over the risks presented by such an option. The trend could leave borrowers facing problems in continuing their payments if their income was to drop in retirement or alternatively they may have to delay retirement. For many however, extending the term can make all the difference in terms of being able to climb onto the property ladder.
This therefore presents many mortgage advisers with a challenge to make clear the risks involved in selecting a longer term mortgage. A need to constantly review longer-term deals is required so borrowers can be moved onto short term deals when their financial circumstances are better suited.
How Mortgage Terms Affect Monthly Repayments and Total Interest
| Term | Monthly Payment | Total Interest |
|---|---|---|
| 25 years | £1,001 | £100,375 |
| 30 years | £898 | £123,312 |
| 35 years | £827 | £147,164 |
| 40 years | £775 | £171,894 |
Illustration based on a £200,000 repayment mortgage and a 3.5% interest rate.
It is all about controlling your monthly budget and having a clear understanding of the risks involved before taking on such an important financial commitment. Seeking the right mortgage advice could not be more essential in giving you that added peace of mind.