First-time buyers will still be paying mortgage in their 70s
THE majority of first-time buyers are now taking out record-breaking mortgages which take up to 40 years to pay off, Britain’s biggest building society said yesterday.
The longer-life loans – which generate thousands of pounds’ worth of extra interest – represent an extraordinary shift from the tradition of a mortgage being a burden which lasted for only 25 years.
But the financial pressure on young people to lower their monthly repayments means many will still be working to pay off their loan well into their 70s.
The average length of a mortgage taken out by a first-time buyer is now 28 years, although many lending giants are happy to hand out loans for up to 40 years.
Lenders such as Halifax, Lloyds and Nationwide now have a maxi-
Before: Lenny Henry looking portly in 2012 mum term of 40 years. Others such as Santander, Barclays and Royal Bank of Scotland offer loans for up to 35 years.
David Hollingworth, from the mortgage broker London & Country, said: ‘The monthly payments are lower but, in the end, a longerlife loan costs people a fortune.’
While the monthly repayments are cheaper, the total cost of the mortgage balloons because they pay much more interest on the loan.
Take the example of a couple taking out a £100,000 mortgage with an interest rate of 4 per cent.
With a 25-year deal, their total interest bill is £ 58,351. With a 35-year deal, the total interest bill jumps to £85,965, according to calculations by the mortgage advisers John Charcol.
Although their monthly repay- ments are cheaper – £528 per month for 25 years or £443 for 35 years – the extra ten years means they are paying an additional £27,600 in interest.
But many young people have no option but to choose a longer deal given the high cost of buying a home. Yesterday the Land Registry said the average house price in London has hit over £400,000 for the
‘Costs buyers
a fortune’
first time, to an average of £403,792. Seven boroughs in the capital have an average price of more than £500,000, including one where the average price is nearly £1.2million.
The Nationwide said prices have been rising for 13 consecutive months, the longest unbroken run since the financial crisis began in 2007. Matthew Pointon, a property economist at the consultancy Capi- tal Economics, described the market as ‘over-heating’.
Experts said the growing popularity of such longer-life loans is a direct consequence of the disappearance of interest-only mortgages – deals which meant monthly payments were cheaper because they were not paying off any of the loan.
As these types of loans have virtually disappeared, the only option is for first-time buyers to switch to a loan which has a longer life.
Ray Boulger, senior technical director at John Charcol, said: ‘A loan with a longer term is the nearest thing they can get to an interest-only mortgage.’
Robert Gardner, chief economist at the Nationwide, said: ‘There is a trend towards borrowers lengthening the term of their mortgage.
‘At present, 52 per cent of mortgages [lent to first-time buyers] are currently over 25 years, up from 40 per cent in 2007. This may, in part, be to lower their monthly repayments, though the shift may also reflect that people are both living and working for longer.’
These figures are based on the experience of all mortgage lenders, not just Nationwide.
Mr Boulger warned lenders’ age restrictions can cause problems for first-time buyers as many insist a loan must be fully repaid by the time a homeowner reaches 70 or 75.
For example, a 35-year-old wanting to take out a deal for 40 years would not be allowed to borrow the money if the lender’s age cap is 70.
Other types of buyers do not opt for longer mortgages. People moving from one home to another typically take out a loan for around 22 years, while those who are remortgaging usually choose an 18-year deal.
Many first-time buyers choose a longer-life loan but switch to a shorter deal when they can afford the higher cost, such as when their first loan deal ends and they need to remortgage.