35-year home loans ‘storing up problems’

Borrowers facing lifetime of debt

The rising popularity of 35-year mortgages could be ‘storing up problems’ for the future, the Bank of england’s deputy governor warned yesterday.

As house prices have surged, a growing number of borrowers are being forced to spread mortgage repayments over a longer period.

Around a third of first-time buyers now take out a loan with a term of 30 years or more, rather than the traditional 25-year limit.

Almost 16 per cent of all mortgages now last 35 years or more, compared with less than 3 per cent in 2005, according to the Bank of england.

Some lenders including halifax and nationwide offer deals lasting up to 40 years. These allow households to cut monthly repayments but charge thousands of pounds in interest.

The trend has alarmed the Bank of england, which fears many people taking out these long-term loans will still be paying off their mortgage when they are retired.

Speaking at the Building Society Association’s annual conference, the Bank’s deputy governor Sam Woods said firms should comply with the ‘spirit as well as the letter of the law’.

he said longer-term loans ‘should not be a problem if lenders can be confident about the availability of such retirement income, or about the scope for the borrower to downsize and use the sale proceeds to pay the balance of the loans’.

But he added that if lenders become too preoccupied with the first five years of repayment while ignoring the latter stages this could ‘store up problems for the future’. Mr Woods also raised concerns that some building societies and banks are offering more risky mortgages to borrowers with small deposits and low incomes.

This is despite the introduc- tion of tougher affordability checks more than three years ago, known as the ‘Mortgage Market Review’, to crack down on risky lending.

The Bank is worried some lenders are relaxing checks to lend more and boost profits.

David hollingworth, of mortgage broker London & Country, said: ‘These longerterm loans are becoming more popular, particularly among first-time buyers.

‘But this comes at a price as these mortgages will often cost tens of thousands of pounds more in interest over the course of the loan.

‘The danger is when people do not overpay them, particularly as interest rates rise.’ A £150,000 loan at 2 per cent and spanning 25 years will cost £635.78 per month, and charge total interest of £40,734.

Spreading the cost over 40 years will cost £454.24 a month, but charge £68,035 in interest.

households have been urged to snap up ultra-cheap mortgages while they can amid predictions of interest rate rises later this year.

Finance expert Charlotte nelson said: ‘Borrowers ... coming to the end of their deal may be wise to consider a low fixedrate now, before it’s too late.’

The interest rate on the average two-year fixed deal is currently 2.26 per cent.

‘Cost thousands more in interest’