Mortgages that may continue for up to 4 decades now make up around half of the market, but should first-time buyers be tempted by such long-term loans?
Historically, most homebuyers got a mortgage for Twenty five years, however in the past few years lenders have started offering much longer-term deals as high as 4 decades, in a bid to attract cash-strapped first-time buyers.
Here, we explain the additional cost of choosing lower monthly payments over a longer time, and provide suggestions about finding the right mortgage term.
Half of mortgages have 40-year maximum terms
New data from Moneyfacts shows that more than 2,600 residential mortgages are now available with maximum terms of 40 years.
These products constitute 51% from the overall mortgage market, up from 36% 5 years ago.
As you can see within the table below, the trend of longer mortgages is promoting significantly over the last 5 years, with 40-year maximum terms rendering 30-year products almost extinct.
| 40 years | 35 years | 30 years | |
| March 2022 | 1,096 (36%) | 1,118 (37%) | 606 (20%) |
| March 2022 | 2,604 (51%) | 2,221 (43%) | 140 (3%) |
Why are first-time buyers borrowing for longer?
After a decade of significant house price increases and low wage growth, many first-time buyers have been priced out of home ownership.
In reaction, lenders have sought to make it easier for them to obtain the finance to buy a house. This hasn’t always been straightforward, with strict legislation governing how much risk banks may take on when approving mortgages.
One of the options is providing the deal on the long time period, to ensure that smaller repayments can be disseminate over a longer period. Lenders will also be considering other options, including:
Ultimately, this means that extending the maximum term of loans – and offering low rates on 90% and 95% mortgages – is the simplest way for lenders to encourage business from first-time buyers.
How a lot more will it cost to gain access to for longer?
Although going for a lend for extended term will reduce your monthly obligations, it’ll ultimately result in you paying back considerably more interest in your loan.
Moneyfacts states that on a lb200,000 mortgage at a rate of two.5%, a borrower would pay around lb897 per month on the 25-year term, or lb660 on a 40-year term.
While this saving of nearly lb230 per month is important, in this instance it might increase the risk for borrower paying lb47,400 more in interest over the course of the deal.
Are the best rates available with 40-year terms?
You might be wondering at this time whether borrowers are penalised for taking out loans with longer terms, but our research shows that this isn’t the situation.
Indeed, at four popular loan-to-value ratios utilized by first-time buyers, many of the lowest introductory rates are on mortgages with maximum terms of 40 years.
Two-year fixed-rate
| Maximum LTV | Best rate with max 40-year term | Best rate with max 35-year term |
| 80% | 1.54% (Halifax) | 1.64% (HSBC) |
| 85% | 1.57% (Halifax) | 1.68% (Barclays) |
| 90% | 1.79% (Atom Bank) | 1.78% (Barclays) |
| 95% | 2.67% (Halifax) | 2.69% (Marsden) |
Five-year fixed-rate
| Maximum LTV | Best rate with max 40-year term | Best rate with max 35-year term |
| 80% | 1.98% (Halifax) | 2.06% (Yorkshire Building Society) |
| 85% | 2.04% (Atom Bank) | 2.06% (Yorkshire Building Society) |
| 90% | 2.24% (Atom Bank) | 2.29% (Barclays) |
| 95% | 3.19% (Monmouthshire) | 3.28% (Mailbox) |
Do banks actually grant 40-year mortgages?
Research conducted through which? last October discovered that over fifty percent of mortgage lenders say they offer maximum relation to 4 decades, but questions remain whether anyone is really granted such long-term loans.
When we approached the largest banks, they were largely unwilling to provide specific data on their mortgage approvals.
Smaller lenders, however, were more forthcoming. For example, Family Building Society said it had approved 40-year mortgages for buyers aged 22-30, while Beverley Building Society said it theoretically offered 40-year terms, but hadn’t had the demand to actually grant this type of long-term loan.
Maximum ages on 40-year mortgages
One from the hurdles for longer-term lending is the maximum age limit that lenders placed on their mortgages.
For example, if a lender will only allow you to borrow up to the age of 70, you’ll simply be able to take out a 40-year mortgage up to the age of 30.
There are signs, however, that banks are increasing the maximum age limits on their own deals to reflect interest in borrowing into senior years.
Darren Cook of Moneyfacts says: ‘Our research shows that 71% of all residential mortgages can end once the borrower is 75 years old or older, whereas five years ago this figure stood at 52%’.
How to choose a mortgage term
The right mortgage term for you is determined by a couple of things: your financial circumstances whenever you remove the mortgage, and your long-term plans.
If dealing with a 35 or 40-year term may be the only way you’ll be capable of getting a home loan at this time, you’ll possess a decision to make over whether to save for extended or make the leap now.
If you do take out such a long-term deal, it can make sense to choose a loan which has no penalties for overpayments, giving you the flexibility to pay for the borrowed funds back sooner, in case your finances dictate.
Advice in your mortgage options
If you’re a first-time buyer looking to purchase your first home, it may be helpful to take advice from a whole-of-market large financial company, who can assess the entire sell to find you the best deal.
