As many experienced home-owners will tell you, the typical period they were always advised to take their mortgage out over, was 25 years, particularly when they bought their first property. Now, however, times are changing.
“Property is much more expensive, mortgage interest rates are low and expected to remain that way for some time and interest-only mortgages are all-but gone,” said Battersea estate agent, Eden Harper. “All of that has led to an increase in the sale and approval of 30, 35 and 40-year mortgages.”
According to the Bank of England’s (BOE) recent Financial Stability Report, the data showed a clear rise in the number of mortgages being agreed that exceed 25-year repayment periods. While in 2005 mortgages with repayment terms spanning 35 years or more accounted for just 2.5% of all mortgages, in the first quarter of 2017, they made up 15% of agreed mortgages.
During the same period, the proportion of home-buyers taking out a mortgage over a period between 30 and 35 years rose to 20% from around 8%.
House Price Affordability
The main culprits behind the increased use of longer-term mortgages, is the higher average level of UK house prices and the stubbornly low rate of earnings growth.
House prices began rising in the 1990s and until now, only really paused for breath for a year or two. That’s some 25 year of rising house prices – give or take a year or two – and it has pushed house prices in some regions, beyond the reach of ordinary workers. Particularly those who are in an industry where bonus payments don’t exist and job cuts have hit.
At the same time as that dynamic, the BOE’s financial stability arm has tightened up the rules on mortgage lending and the essential affordability criteria borrowers are required to meet to secure a mortgage. One answer to tougher affordability issues, has been to encourage more liberal use of longer-term repayment mortgages.
“For those who still want to buy their own home, the only option is to agree a longer mortgage term,” said Andrew Reeves. “Of course, the thought of being saddled with a big mortgage for the rest of your working life isn’t something many people relish. However, things do change and plenty of home-owners don’t end up making mortgage repayments for as long as that initially agreed term.”
Take Advantage of Lower Interest Rates
While long-years of mortgage debt aren’t an enjoyable prospect, the current low level of mortgage interest rates helps to soften the blow for many home buyers. And, even though there is talk from the BOE of raising rates, it will only be done slowly and by small increments. It appears that detail is firmly in the minds of many lenders as there are some excellent mortgage interest rate deals currently available.
The BOE’s mortgage interest rate database, shows the average 10-year fixed rate mortgage, secured with a 25% deposit, was 2.78% as of July 31, down from 2.82% in June and just above the record low of 2.75% recorded in October 2016.
“The current ultra-low level of mortgage interest rates is unlikely to last forever, but the rate at which they rise isn’t likely to be quick, giving home-owners plenty of time to reassess their situation should they need to,” M&M Property. “If you can secure one of the lower rates for a period of ten years, then it wouldn’t be the worst financial decision you make.”