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Trade bodies defend longer-term mortgages after PRA warning

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Mortgage lender trade bodies have defended the trend towards longer-term mortgages after the practice was criticised by the Prudential Regulation Authority yesterday.

PRA chief executive Sam Woods has warned against 35-year mortgages as part of a wider criticism of lenders not complying with the “spirit” of regulation.

Woods says longer-term loans cut monthly instalment amounts but also increases the amount of interest paid over the life of the loan.

He says the PRA is worried that lenders might focus too much on the first five years of the loan and ignore the rest of the term.

Changing society

But lender trade bodies say their members are just reacting to a changing society, and that longer mortgage terms are handled sensibly.

Building Societies Association head of mortgage policy Paul Broadhead says: “Sam Woods picks up one of the realities that relate to the whole mortgage market. House prices are high, wages are not keeping up with inflation and mortgage terms are getting longer to make buying a home affordable.

“First time buyers are getting on the ladder progressively later and we have an ageing population. These are real unstoppable socio-economic changes that are already being experienced by lenders and consumers.”

Broadhead adds that the BSA’s focus is on sensibly adapting to a changing market and the shifting needs of customers.

He says: “This will include borrowing into retirement for some.  Lending into retirement is not inherently riskier, but the risks are different. Already 34 building societies have lifted or removed their upper age limit  for mortgage lending, but alongside that have worked to develop their risk assessment and affordability models, all alongside the regulators.”

Unlocking home ownership

A spokesman for UK Finance says lenders do take customers’ needs into account for the whole mortgage term.

The spokesman says: “Mortgage lenders are required to assess the affordability of a loan throughout the whole length of the mortgage.

“It is only the interest rate stress test that relates to the first five years – all other elements of affordability consideration apply for as long as the lender expects the loan to run.”

The spokesman says the longer terms suit consumers.

He says: “It is true that typical mortgage terms for first-time buyers are longer than they used to be – around a third of first-time buyers currently take out a mortgage with a term of over 30 years, but most of these are for less than 35 years.

“This is a by-product of the fact that house prices that are high relative to incomes, as well as the fact that interest-only mortgages are now rarely available to first-time buyers, so a longer term is a legitimate way of cushioning the initial cost, while recognising that the long term total cost of the loan will be higher.

“Longer term mortgages provide access to home-ownership when this might not otherwise be possible, which provides an important and welcome element of consumer choice, still lodged within a responsible lending framework.”

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  • George Williamson 13th July 2017 at 4:43 pm

    I am almost age 50 and started with a 37 year Mortgage Term at age 23 – to say that a 30 or 35 year term is a new thing is just an admission by Mr Sam Wood that he is blithering incompetent in his attempt to understand the mortgage market and needs to RESIGN from the PRA.

  • Corby Macdonald 12th July 2017 at 7:14 pm

    When I read the comments from Sam Woods, I felt it was done from someone who is out of touch! If my understanding is correct, the 25 year term, was born of the “endowment policy” when the lenders and the insurers, discovered that 25 years was the optimum term for the maximum return for their products! We know what happened there, don’t we? The lengths of term to make the mortgage fit such things as a clients budget, but, also a lenders Debt to Income Ratio calculations, as well, but, what was failed to be discussed, is that the mortgage is still a flexible tool, there is nothing to stop the client reducing their term, when they review their mortgage, which we should encourage our clients to do, talk about a plan for the future, not just the first few years, talk about overpayments. I do this with all of my clients, because its the correct way to treat them. I think maybe the PRA etc. should speak to the people who are still at the coalface not, just with the fellow chairman or CEOs, then they would understand what the people who are taking mortgages out, want and need.