The time of the 25-year mortgage is coming to an end as lenders are now far more likely to offer new homebuyers a 40-year term. This provides those who are working with a tighter budget a greater chance to jump onboard the property ladder.
There are plenty of buyers that love this option. The main reason for this is that it allows monthly payments to be significantly lower. So, those working with a limited income will find it far easier to afford the cost of owning a home which can be crippling. It also allows individuals to buy a significantly more expensive home than they would otherwise be able to afford. Particularly in areas of the UK where even basic home prices are higher such as around London. However, there are issues to consider as well before determining whether a 40-year-old mortgage could be a blessing or a curse.
Weighing The Costs
A lender’s affordability criteria can be a barrier for those on a limited income. A 40-year mortgage immediately provides relief because the monthly payments are lower, and ‘appear’ more affordable.
For example, someone borrowing £200,000 over 25 years at a rate of 3% would pay £949 a month for their repayment mortgage. If they chose a 40-year term, their monthly payments would be £716, around £233 a month less.
That said, those extra years added on to the term of the mortgage will lead to thousands more in interest. This is to be expected with mortgage extending through several decades and the increased cost could be significant. Rather than paying £85,000 in interest for twenty-five years, they might instead pay closer to £144,000. That additional £59,000 is a massive blow even if it is stretched out over a longer period, resulting in an extra £123 a month in interest, over the 25 year mortgage option.
One must also think about the age at which the mortgage will finally be cleared. Right now, the average home buyer is just over thirty. As such, the debt could continue through retirement and ultimately even eventually impact dependants.
Solving The Issue
Those who are interested in a forty-year mortgage may not be locked into this deal forever. While the initial longer term could allow them to claim a position on the property ladder, they could also see significant pay rises in the future. At this, point, the buyer could consider remortgaging and seek out a shorter term. This would solve the issue of higher interest and debt that carries through to the final years of an individual’s life.
If an individual chose to keep the initial mortgage, they could still consider making overpayments. This ensures that the debt is cleared faster. It’s important to check whether this is a possibility within the mortgage terms. However, many lenders will allow homeowners to overpay by ten percent every year without having to worry about additional costs.
As such, there are a variety of options for those who are initially intrigued or attracted to the idea of a forty-year mortgage.