Borrowers turn away from ‘marathon’ mortgages
The data from the regulator, the Financial Conduct Authority, revealed that a paltry 27 mortgages were taken out in 2020 with a term of 40 years or above. That’s in comparison to the 2,400 mortgages of this term taken out in 2019, which itself was sharply down from the 9,575 the year before.
By contrast the number of deals taken out over a 35-40 year term was largely unchanged year-on-year at 24,336 (from 24,423 in 2019), while around 43% of borrowers opted for a deal over a term of at least 25 years.
Quilter suggested that the “dramatic drop” in “marathon mortgages” was likely to be down to fewer providers offering such lengthy terms, while those that did may have not provided them for borrowers with only a small deposit. Longer terms tend to be more favoured by younger buyers who have the time in order to pay them off, but who do not boast much in the way of a deposit.
A separate study from Quilter in January identified a sharp drop off in the number of low-deposit mortgages taken out last year.
The appeal of a long mortgage term
The term of your mortgage will have a big impact on the size of your monthly repayments, and therefore how affordable your repayments are.
For example, if you want to borrow £200,000 to purchase a property at a 3% interest rate, then over a 25-year term your repayments will come to £948 a month.
However, opt for a 35-year term and those repayments drop to £770 a month, offering you far more breathing space in being able to cover them each month.
There is a significant downside though. As you are taking longer to pay off the mortgage, interest is being charged for longer on your debt, meaning it costs you more overall. In our example above, that 35-year term deal will cost you a total of £323,274, compared to £284,527 with a 25-year term. In other words that extra 10 years in order to clear your debt comes at a cost of almost £40,000.
Paying hand over fist
Gemma Harle, managing director of Quilter Financial Planning, said that the stricter affordability rules introduced since the financial crisis had inevitably made longer-term mortgages more popular, but cautioned they could come with a sting in the tail.
“On the face of it a marathon mortgage can be a good way to get someone’s foot on the property ladder. However, what you might save in monthly payments you will pay for hand over fist in interest over the whole term.”
She added that even if you do opt for a longer-term deal, it’s worth checking to see if you can reduce your term should your finances change, or whether you will be able to make overpayments when finances allow in order to pay the loan off a little quicker, saving money in the process.