Hardly a week goes by without the mortgage industry coming in for criticism. The latest irritant to get under the skin of the tabloid newspaper commentators is extended mortgage repayment periods.
Research undertaken by MoneyExpert.com looked at 126 mortgage lenders and found that 23% offer a maximum term of 25 years while 30% offer a maximum term of 40 years. Tesco Personal Finance offers the longest term with a maximum of 52 years while First Direct offers a 47-year term.
I have just listened to a conversation on the radio in which a consumer so-called expert criticised this lending policy and effectively insisted that the public are not sophisticated enough to understand how these products work. He said people should be aiming to pay off their mortgages as soon as possible to avoid storing up debt problems.
He added that the concept of the 25-year mortgage was only developed to fit into an endowment product and people in many countries aim to pay off their mortgages as quickly as possible – within 15 years, he said.
Well, good luck to them. Most people living in this country cannot begin to think about paying off their mortgages so early. Even getting a foot on the property ladder is no more than a dream for many people. Lenders should be congratulated for bringing that dream a step closer to reality with the use of innovative products with extended repayment terms.
It makes sense that lenders are responding by offering greater flexibility to borrowers whether it is by allowing them to borrow more or enabling them to spread payments over a longer period.
In doing this they are not being merely opportunistic, rather they are being responsible. That’s because lenders have moved away from an income multiple-based lending mode to one that focusses on affordability. In the past, clients such as single professionals with no dependants were restricted when it came to the amounts they could borrow. But it was always obvious that they could afford to pay a much larger proportion of their income on a mortgage than, say, someone with a family to support on a single average income. Now they can.
Similarly, increasing the term on a mortgage from the traditional 25 years to 40 plus will reduce monthly payments for borrowers with less disposable income. Lenders are recognising the sense of this approach. Abbey recently launched a deal offering up to 5 x salary. This approach is being reflected in the sub-prime marketplace too with the news that Platform has stretched its income multiples up to 5 x income on sub-prime products.
But we should also be aware of the circumstances of many borrowers. Indebtedness is at record levels, the number of possession orders on mortgage arrears has risen 15% in the past year, unemployment continues to rise and the base rate has hit 5%.
Brokers should be wary of borrowers extending themselves too far and recommending appropriate mortgage payment protection insurance policies.