The pros and cons of taking a 40-year mortgage

The pros and cons of taking a 40-year mortgage

It is beginning to look as if the 25-year mortgage has had its day.

The average cost of a first-time buyer home has gone up by 21% over the past 10 years from £172,659 in 2008 to £208,741, according to Halifax.

Meanwhile, the average first-time buyer deposit has shot up by 71% since 2008, to £33,127 now.

Tougher affordability checks from lenders have also made it increasingly difficult for first-time buyers with smaller deposits to get a mortgage.

As such, first-time buyers struggling to get on the housing ladder are increasingly taking out mortgages for longer terms to meet tougher affordability checks.

The rise of the 40-year mortgage

Just over half of all residential mortgage products currently available have a standard maximum mortgage term of up to 40 years, up from 40% five years ago, according to financial data firm Moneyfacts.

The biggest advantage of stretching out the mortgage term is that you can reduce your monthly repayments as they are spread out over a longer timeframe. However, this means you end up paying interest for longer, which increases the ultimate cost of your loan.

For example, 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, resulting in an additional £47,419 in interest.

“Stretching your mortgage term means you can reduce monthly payments”

Work the system

One way of getting around this is by overpaying on your mortgage, then when you come to remortgage you can reduce the term of the loan. However, make sure your lender allows you to overpay it penalty-free first.

However, if you opt for a longer-term mortgage you significantly reduce the number of lenders you can borrow from.

One of the best deals out there for first-time buyers looking to take out a longer-term mortgage is from Sainsbury’s Bank.

For a first-time buyer with a 10% deposit looking to buy a £200,000 property over 40 years, Bank of Ireland is offering an initial rate of 2.2% on a two-year fixed rate mortgage. This comes in at an annual cost of £6,571, or £564 in monthly repayments.

In recent years, mortgage providers have also been extending the maximum age a borrower may be at the end of a mortgage.

According to Moneyfacts 71% of all residential mortgages can end when the borrower is 75 years of age or older, whereas five-years ago this figure stood at 52%.

However, the longer a borrower extends their mortgage term the older they will be when they have finally repaid their mortgage. This could seriously affect your retirement plans and mean you have to work longer than you initially planned.

The City watchdog the Financial Conduct Authority has warned that 40% of all first-time buyers could be paying off their mortgage when they retire.

FEATURED PRODUCT

Bank of Ireland two-year fixed-rate mortgage 2.2%

Bank of Ireland’s two-year fix comes with a rate of 2.2% for buyers with a 90% LTV.

Based on a £180,000 mortgage repaid over 40 years on a £200,000 property, this mortgage costs £564 a month – £6,571 a year over the fixed period – with no fees and £400 cashback.

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