Is the longer-term mortgage trend creating future problems?

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A trend towards longer mortgage terms is helping to bring down monthly repayments but could cause problems in the future, brokers believe.

Figures from the Bank of England show almost 16 per cent of new mortgage loans taken out are now for terms of 35 years or more. That is up from just 2.7 per cent in 2005.

Over the same period the number of mortgages with terms between 30 and 35 years has climbed from around 8 per cent to almost 20 per cent.

Among first-time buyers the figures are even higher.

More than 28 per cent of mortgages taken out by first-timers last year were for 35 years or more, according to the Financial Conduct Authority.

The figure has more than doubled the 13.8 per cent recorded in 2006.

Reducing repayments

Historically, a 25-year term has been the starting point for the majority of mortgages. But buyers battling rising house prices can reduce their monthly repayments if they extend the term.

While this may help by lowering their monthly outgoings, however, it means they pay more over the full length of the mortgage term.

But mortgage advisers say that, in many cases, it is a necessity.

Xpress Mortgages adviser Rachel Lummis says: “The market has changed significantly over the past decade and for many people property is just not affordable any more.

“A typical two-bedroom home in Surrey might be £330,000 and that is a large loan amount to service each month, which means many buyers are opting for the maximum mortgage term they can possibly get to keep costs down.”

Lummis has seen a number of first-time buyers recently opt for 40-year mortgage terms.

But Create Finance director Pete Mugleston worries buyers are storing up problems for the future.

He says: “Even with stress-testing there is a danger in stretching the mortgage term because a property is on the cusp of affordability for a borrower. If you are already stretching yourself then you may have problems when interest rates eventually rise. It’s something people need to think about.”

Reducing the term

Lummis says she hopes that by the time rates rise, borrowers will be able to be in a position to refinance on a shorter term.

She explains: “The term isn’t set in stone. In many cases we consider it a starting point which can be reviewed when the fixed-rate comes to an end. By that time a pay rise or job change might allow the borrower to reduce their term.”

But Middleton Finance director David Bailey says the trend may be more apparent in the south of the country. The Yorkshire-based adviser says: “We operate in the north where house prices are still lower than, say, in London. Although slightly more people are taking longer mortgage terms, it is by no means a majority.”

Indeed, a Freedom of Information request revealed that first-time buyers in Ipswich, Suffolk are the most likely to take out long-term loans. Some 45.4 per cent of mortgages taken out in the region in the first three months of the year were for 35 years of more.

Yet many experts think the trend towards longer mortgage terms will continue for now.

Mugleston says: “In an ideal world everyone would have the shortest term possible and pay off their mortgage as quickly as possible. But the number of providers offering 30 or 35-year terms was a lot lower a few years ago, and it is likely to keep increasing.”

Lummis adds: “I think more lenders will review their maximum mortgage terms and increase them to accommodate this market, which is needed. In many cases a 35-year term is no longer long enough to make a mortgage affordable. Perhaps we will see some lenders raise their maximum to 45 years in the future.”

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