Should we be worried about the rising popularity of 35-year mortgages?

 
Jeremy Duncombe
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A decade ago, just 2.7 per cent of mortgages were 35-year terms or more. But these longer contracts have been increasing in popularity, and during the first quarter of this year, 16 per cent of homeowners took out 35-year terms.

The Prudential Regulation Authority recently warned lenders that offering 35-year term mortgages increases the possibility of final instalments being paid off in retirement.

Pair this with recent headlines stating that customers are falling into a “borrowing trap” on 35-year terms, and this does not paint the best picture for the growing number of borrowers choosing this option.

But is there more to this story than these cautionary headlines?

The olden days

The shape of the market has fundamentally changed in response to regulation and customer needs.

During the early nineties, many borrowers took out interest-only mortgages with a traditional 25-year term. Many were sold with endowment policies linked to the stockmarket, and were therefore designed to pay off the full amount of the loan at the end of the term.

As borrowers were only paying the interest on the loan, rather than the capital, monthly payments were deemed more affordable.

Caught out by tightened rules

However, after the financial crash of 2008, the Financial Conduct Authority (FCA) tightened lending on interest-only mortgages, and now they make up less than two per cent of new loans, compared to a 40 per cent peak in 2007, according to the Council of Mortgage Lenders.

Instead, repayment mortgages are now commonplace, in which borrowers pay off considerable amounts of their mortgage as they go, rather than waiting for an endowment policy to mature.

But with average house prices rising to £221,000 this June from £150,000 in 2005, ordinary buyers are now having to borrow far more to purchase a home than in the past.

Meanwhile, the 2014 Mortgage Market Review forced lenders to introduce more stringent rules on affordability, meaning the traditional 25-year term is no longer viable for many borrowers.

Cultural shifts

These changes have prompted an increase in the number of people needing or willing to choose longer term mortgages in order to buy the property they want.

Attitudes towards home ownership and paying off debt have also changed. With the average first time buyer now 32 years old, borrowers want to balance their outgoings with their lifestyle. And the negligible interest paid on savings means many now prefer to spend their disposable income rather than save it.

At the same time, people are starting to marry and have children later, as well as live and work longer. As a result, many borrowers are now open to the idea of borrowing into retirement, with some lenders increasing their maximum loan age to 85 years.

This shift in attitude has altered the housing market over the past few decades, and increased the popularity of 35-year term mortgages among first times buyers, who may feel that they have little choice if they want to buy a home.

It’s not all bad news

The good news is that there’s more detail behind the headlines.

The FCA’s caution overlooks the fact that most borrowers will move home or remortgage several times in the space of 35 years.

Many start with a 35-year mortgage term because it’s what they can afford at the time, but the majority will not stick to this term as their circumstances change.

Escaping the debt trap

Borrowers can often shorten their mortgage term by increasing their monthly mortgage payments. More importantly, however, because they are repaying capital from day one, their debt shrinks.

Those customers on a standard variable rate (SVR), or coming to the end of their mortgage term, should seek advice from a mortgage broker.

For some time now, SVR rates have stayed stubbornly high relative to the bank base rate, and borrowers have the potential to save themselves up to £1,500 a year by looking at what other deals are available.

With so many options to choose from, a mortgage broker can help wade through the information to provide the best solution.

However, looking at the affordability of repayments in isolation is only part of the picture. The problems that borrowers face are actually down to a lack of supply in the housing market, and mortgage affordability troubles will only continue until this is resolved.