40 year mortgages: too long, or just right?
The length of mortgage terms has always been a hot topic. But with the likely age of retirement reaching new highs, and lenders criteria also as strict as ever, a longer term seems inevitable to many new borrowers.
There are a number of factors contributing to the length of a mortgage term. The most significant being affordability and budget.
Lenders calculate clients’ affordability based on various criteria, length of the term being one. It stands to reason that if the loan available to an applicant significantly increases with a higher term this will be attractive. House prices have been increasing steadily over the last 10 years and are at an all-time high (in most areas), in contrast, the affordability calculations lenders now employ have got stricter, often including many more regular expenditure as well as committed expenditure on a monthly basis.
A borrowers’ budget is the maximum amount affordable per month when taking into account all the other expenditures they have, committed or otherwise. If the monthly payment for their mortgage reduces with a longer term, then this will look extremely attractive. After all who wouldn’t want to pay less per month for the same house?
Add this to the potentially higher loan amounts available and more and more borrowers will be considering longer mortgage terms. How else are they going to be able to afford the property they need?
My own take on the longer mortgage terms hitting the headlines is that like most things the 40-year term may be ‘a means to an end’. Similar to clients with adverse credit who may be forced to use a lender with a higher rate for their first fix and then move to a cheaper lender after the first fixed rate period finishes. A borrower with a 40-year term may well plan to be in a better budgetary position after their first fixed rate term comes to an end, thus allowing them to reduce the term upon re-mortgaging. Of course, their ‘plan’ to be in a better position may not happen by that time.
It is too easy to chastise borrowers and their brokers alike when discussing longer mortgage terms. The fact of the matter is that clients use brokers to do a job, in many occasions this is to assist them in borrowing the maximum amount they can, allowing them to compete with all the other buyers in the same position as them, if they can get more money over a 40 year term and the monthly cost is lower I am afraid the total amount of interest payable over the entire term does not really play a major role in the borrows decision making (even if this is pointed out by the broker).
Opinion by Kent based Mortgage Broker Nick Daynes , Director of Prospect Tree Mortgages.