Borrowing over the longer term can add up to a fortune
Q: I recently heard of long-life loans being a possible solution to lower mortgage monthly repayments, is this true?
A: Yes it is absolutely true, these deals do exist. A 25-year mortgage term has traditionally been the longest loan term people look for. In fact, up until the market crash most people were looking to pay their mortgage off as quickly as possible – but not anymore.
Now, people want to own their own home but they want to live a little too, and by that I mean leisure pursuits, the odd takeaway, a decent summer holiday etc. This has led to an upturn in the need and requests for much longer loan terms. Some borrowers are looking for 40 years.
We can perhaps put this into perspective and suggest it is much more relevant to the market in the South East, and more particularly London. Given the inflated prices and housing demand in London it would be virtually impossible for the average working person to even consider living and working in the capital, therefore the only option for most is to take a loan over a longer term to reduce the monthly re-payments.
Maybe this is a realistic solution given that the majority of people are expected to work well into their old age, and can, therefore, commit to a longer-term loan. It’s probably a fair option to consider when looking to buy in London too as the forecast is that property will continue to increase in value, allowing you to bank on the potential of selling at a profit and walking away with some money.
However you do have to bear in mind that the majority of first time buyers and re-mortgage customers aren’t all that young, with the average age for first time buyers having increased over the last 10 years. Also, locally here in Yorkshire, the property market isn’t likely to benefit from hyperinflated prices, certainly not to the extent seen in London.
Mortgage providers currently offering 30 year-plus loan terms are Santander, which allows borrowers to repay over 35 years. HSBC has a 30 year limit, and the Halifax and Nationwide allow borrowers 40 year terms. Carrying out my own calculations a £200,000 mortgage over 25 years at five per cent, with the typical arrangement fee of £995 added, produces a monthly repayment of £1,175. Take the same deal over 40 years and this reduces the monthly repayment to £969, a massive £206 a month less.
Depending on where you viewpoint is this may look like a significant monthly saving, but the total amount you would actually repay over 40 years, including the interest, is £465,212.
That is nearly half a million pounds. Is it really worth it?
Hoever,if this is just for the initial two-year fixed rate period, and you are looking to remortgage and reduce the term of the mortgage once the first two years have passed, then it can provide you with some much needed flexibility.
Depending on your personal circumstances this may be a welcome solution to a shortterm problem. Say you have a double income household and it suddenly becomes one, through a job loss or an unexpected health problem, the option to lower your monthly repayments would certainly help. I would advise that this is viewed as a short-term solution.
It has been reported that more than a third of people renting, or with a mortgage, expect to struggle to keep up with their repayments. I do appreciate the high price of property compared to the lack of wage increases and the rising costs of living almost makes longer loan terms essential, but could the reality be we still haven’t learnt how to budget?
We have to be realistic about our finances. What outgoings and purchases are you making that are simply not essential?
Could you save more money each month by forgoing that weekly trip to the cinema or that daily croissant and latte?