Bor­row­ing over the longer term can add up to a for­tune

Yorkshire Post - Property - - PROPERTY - Franz Muehlthaler

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?

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