More than half of residential mortgages have terms of up to 40 years lowering repayments but total interest costs are much higher.
Research from Moneyfacts reveals that 57% of residential mortgages for first time buyers, home movers and remortgage buyers now have a term of up to 40 years reducing the monthly repayments.
This makes the mortgage more affordable on a monthly basis compared to a 25-year term but 15 additional years can cost you tens of thousands in extra interest costs.
For many first time buyers the only way they can afford the repayments is to extend the mortgage term and this may be the only way of getting on the property ladder.
The longer a borrower extends their mortgage term, the older they will be when they have finally repaid their mortgage which may not be affordable if they are retired.
Buying a home more affordable
With a 40-year term a £250,000 mortgage on 2.5% fixed interest has repayments of £824 pm compared to a 25-year term with repayments of £1,122 pm, saving you £298 pm.
However, for a 40-year mortgage the total interest you pay would be £145,733 whereas over 25 years the interest is much lower at £86,463 saving you £59,270 with this shorter term.
For remortgage buyers at the end of your mortgage deal, you can avoid the lenders expensive variable rate and switch to a preferential rate to reduce your monthly repayment costs.
The following table from Moneyfacts shows the number of lender products and the maximum mortgage terms over the last two years.
| Mortgage term | Oct 2018 | Oct 2019 |
|---|---|---|
| 25 years | 149 | 168 |
| 30 years | 136 | 195 |
| 35 years | 1,645 | 1,735 |
| 40 years | 2,412 | 2,782 |
There are now 2,782 residential mortgage products currently available have a standard maximum mortgage term of up to 40 years and only 168 with a maximum 25-year term.
Darren Cook finance expert at Moneyfacts said. historically, a standard mortgage term generally amounted to a period of 25 years, but a growing majority of products are now available to be extended for a 40 year period.
By extending their mortgage term, borrowers may be looking to reduce their monthly repayments and therefore are more likely to meet strict affordability requirements, says Darren.
Mortgages restricted by age
Not everyone can access a 40-year term as the lenders have a maximum age for a homeowner at the end of the mortgage.
Lenders such as Santander, TSB and Nationwide Building Society have a maximum age of 75 and you must be aged 35 or under at the time you take out a 40-year mortgage.
Other lenders such as Halifax, Leeds Building Society and Lloyds Bank have a maximum age of 80 and a number of small Building Societies have no maximum.
Darren Cook said, the Yorkshire Building Society is the latest mortgage provider to increase its maximum mortgage term criteria to 40 from 35 years and maximum age at the end from 75 to 80 years.
The mortgage term is not important to buy-to-let investors as they typically pay interest only and the lender requires the rental income can exceed 145% of a notional mortgage interest rate.
For older retired homeowners that are required to repay their loan by the lender, rather than downsizing the equity release buyer can agree a lifetime mortgage where no monthly repayments are required.
What are your next steps?
Talk to our London City Mortgage brokers for advice if you remortgage your existing home and want the best mortgage deal or release capital, buying your first home, moving home or a buy-to-let investor.
For older homeowners releasing equity from your property, our LCM mortgage advisers can recommend the lifetime mortgage, accessing wealth to repay an interest only mortgage or pay university fees for grandchildren.
Learn more by using the equity release mortgage calculator, mortgage cost calculators, and property value tracker chart. Start with a free mortgage quote or call us and we can take your details.
