A sign of the times – first-time buyers and the 40-year mortgage
Due to the growing disparity between wage levels and property prices, many first-time buyers are forced to take out longer and longer mortgages to get on the property ladder.
It was only 30 years ago that taking out a mortgage with a term of longer than 25 years drew gasps from the majority of homeowners. In the mid-1980s, while property prices were still increasing faster than wages, the discrepancy was still bearable enough for the average UK home buyer to apply for a mortgage with the intention of paying it off in less than a quarter of a century.
Flash forward to 2016 and that gap has widened substantially – to the point where many within the 25 to 34 age range are giving up hope of ever owning a property, even with the availability of now-standard 30 or 35-year mortgages. For many UK property selling experts, it is a worrying sign for the future that a 40-year mortgage is now a requirement for many buyers to be able to buy a home.
With over 60% of mortgages now lasting over 25 years, many are prophesising that a 40-year term will be the maximum length a lender will ever allow without risking a loss – and if a buyer cannot be successful in their application before they reach the age of 30, the chance of becoming stuck in the rent cycle is greater and greater.
For many, the biggest issue surrounding long-term mortgages is the additional repayments they are forced to make thanks to the accompanying interest rates. Those opting for 40-year as opposed to 30-year terms will pay a further £63,398 before their accounts are settled. Although a longer term allows for lower monthly payments, the total balance of many mortgages is reaching a point that many consider untenable. This increase is also projected to impact future sellers, as those looking to buy begin to consider finding a lender with favourable terms increasingly difficult, which could ultimately lead to a slowdown in the property market.
There are other options available for sellers looking for a fast house sale, including property buying companies who can bypass the mortgage application process, opting instead to offer a cash sum in direct exchange for a property no matter its location or condition. Meanwhile, those who favour the traditional route of using estate agents are facing an arduous journey to find buyers with the necessary reserves to purchase.
Another negative aspect for potential buyers is that they will often be forced to take later retirement to ensure final repayments can be made, heavily influencing their willingness to apply for a mortgage in the first place.
“Lengthening payment terms provide strong evidence that such pressures are intensifying,” said Bob Pannell, chief economist at the Council of Mortgage Lenders. “Although the use of longer terms varies greatly across different types of borrower, reflecting their respective age profiles, the underlying trend is clear.”