35 and 40 year mortgages are the latest big idea for homebuyers
Everyone knows that mortgages are a swizz, weighted heavily in the favour of the ones with all the money, i.e. the banks. If you take an assumed interest rate of 3.8% averaged over a 25 year term, the total repayable on a £200,000 mortgage will be over £310,000. That’s more than half the house again. However, despite the crippling effects of compound interest, more and more first time buyers are turning to 35 and 40-year mortgages in order to get on the ladder, despite then having to pay back more than double the value of their home.
Figures from the Council of Mortgage Lenders show that of the almost 80,000 first-time buyers in the second quarter of 2014, more than 22,000 took out mortgages with terms exceeding 30 years, an increase of nearly 10% per cent since 2010. And it’s not just those trying to get on the ladder who are falling into the longer term trap- the number of non-first-time buyers taking on the longer mortgages also rose from 5% to 12% since and 4,000 people remortgaged their property with a mortgage of more than 30 years, more than five times the number in 2010.
The attraction is that the monthly repayments will be lower than those with a shorter term, with the idea that the assumed young professionals taking out these mortgages will cut the terms, and thereby slash the total repayable, once they start raking in the cash, although debt charities are wary of people predicting their rosy future circumstances with such alacrity.
But let’s look at the actual numbers. A £200,000 mortgage spread over 35 years with an initial 4% interest rate and £995 fee equates to repayments of £373,781 at £890 per month, which is around £150 a month cheaper than a 25 year mortgage. But if that same mortgage is spread over 40 years, the total cost is more than £403,000, and costs only £50 a month less than a 35 year term.
Besides, with the average age of housebuyers being around age 32 (which, contrary to media scare stories is roughly the same as what it was 20 years ago, according to Proper Research), a 40 year mortgage would take you well into your sixties. Even though we will all be forced into working to 75 by then, surely most people would like to have paid off their mortgage a little while before they conk out stop working. Besides, how will you be able to pay for your children’s deposit if you’re still forking out for your own mortgage…