Desperation to get on the property ladder pushes buyers to 30-year loans

·3 min read
Buyers' desperation to get on the property ladder pushes average home loan to 30 years
Buyers' desperation to get on the property ladder pushes average home loan to 30 years

First-time buyers are paying tens of thousands of pounds in extra interest by taking on longer home loans in a desperate bid to meet banks' requirements for new mortgages.

Average first-time buyer mortgage terms hit a record high of 30 years in June, as high house prices, rocketing inflation and soaring mortgage costs pushed buyers to find new ways to cut down monthly repayments.

This was a jump from 28.6 years in June 2016, according to UK Finance, the lender body. In 2005 – when house prices were far cheaper in relation to earnings – the average mortgage term was just 25.5 years.

Lewis Shaw, of Shaw Financial Services, a mortgage broker, said: “Any first-time buyer now is taking out a 30, 35 or 40-year mortgage.”

Rapidly rising inflation and mortgage rates have brought a rush towards longer terms over the last year, Mr Shaw said.

Nick Mendes, of mortgage broker John Charcol, said: “I have probably seen a 20pc to 30pc increase this year in buyers looking for 35 and 40-year mortgage terms.

Aaron Strutt, of Trinity Financial, a broker, said it is the buyers who are most financially stretched – namely first-time buyers – who are taking out the longest mortgage terms.

Mr Strutt said: “Buyers need larger mortgages because houses are more expensive. Then there is everything like credit cards, loans, childcare costs – the costs are all going up and it all goes into a lender’s calculations.

“That means buyers need longer mortgage terms to be able to meet affordability criteria. Buyers don’t want it, but they need it to be able to get a mortgage.”

Extending the term of a mortgage spreads the capital repayments over a longer period of time, which means a buyer’s monthly payments are reduced.

A buyer taking out a £200,000 mortgage with a two-year fixed-rate deal at 3.49pc on a 25-year mortgage term would pay £2,000 per month, Mr Strutt calculated.

If they took out the same mortgage over a 30-year term, their monthly payments would fall by £206 to £1,794. With a 40-year term, their monthly bill would be £1,547.

But experts warned that homeowners will pay huge extra sums in interest as a result.

The buyer taking the 25-year mortgage term would pay a total of £149,972 in interest across the entirety of the deal, Mr Strutt estimated.

By increasing the term to 30 years, the buyer would pay an extra £37,642, bringing their total bill to £187,614 – overall, their total costs would be 25pc higher.

With a 40-year term, their total interest bill would be £268,348 – 79pc more than if they had taken the 25-year term. That means that to save £5,438 in monthly payments over the first two years of their deal, they will end up paying an extra £118,376 over the course of the mortgage.

Mr Mendes said: “The longer the period of time you borrow money over, the more you pay in interest.”

There has also been an increase in homeowners extending their terms when they remortgage, said Mr Shaw.

He noted a couple who extended their mortgage term when they refinanced from 11 years to 19 years. By doing this, alongside consolidating their debts, they reduced their monthly payments from £1,050 to £420.

“They will pay more overall, but these are payments that they can afford. They did that purely because they were concerned about rising prices. They have got some headroom now, but the risk is that actually people get further into debt because they free up more disposable income,” said Mr Shaw.

Homeowners who have taken out mortgages over a longer term can reduce the terms of their mortgage further down the line or make overpayments, Mr Strutt added.