Half of home-buyers would consider a 40-year mortgage
Half of home-buyers would consider a 40-year mortgage to keep monthly repayments affordable and get onto the property ladder sooner. But there are some big catches...
April 23, 2019
Half of prospective home-buyers would consider taking out a 40-year mortgage to keep repayments affordable and get onto the property ladder sooner, according to a study by Santander Mortgages.
The bank says a 40-year mortgage could help 3.25 million more first-time buyers get onto the property ladder, compared to a 25-year term. The lender says its own data shows the average monthly repayment for a 25-year mortgage falls by £263 when spread over 40 years.
40 year mortgages on the rise
Taking out a 40-year mortgage is increasingly common. More than half of all mortgages can now be taken on a 40-year term, up from 36% five years ago, according to research by Moneyfacts.
However, despite their increasing popularity, there is still confusion about how they work. The study by Santander Mortgages found 23 per cent of buyers didn’t realise that spreading a mortgage over a longer term would mean lower monthly repayments.
For advice on mortgages and how they work, read our guide on what type of mortgage should I get?
A step on the ladder, but beware the costs
A longer term mortgage is attractive in that it brings with it lower monthly repayments. They can offer buyers more flexibility in their monthly budget. And for some it could mean they can actually afford to buy their own home vs continuing to rent.
But choosing a 40 year term, means you will pay significantly more interest over the life of the mortgage than if you opted for a 25-year mortgage.
For example, a £200,000 repayment mortgage at a rate of 2.5% over 25 years means a monthly repayment of £897.23 and you’ll pay £69,169 in interest over the 25 years.
The same mortgage taken over a 40-year term would cut your monthly repayments to £659.56, but the total interest you’ll pay soars to £116,588.
Paula Higgins of the HomeOwners Alliance says, “If you take out a 40-year mortgage, we advise you see it as a first step on the ladder to home ownership and not as an long-term solution.”
“There are things you can do to reduce the amount of interest you pay overall, such as making overpayments, whether that’s on a regular basis or as a one off. But in reality most people struggle to overpay while paying bills and running a home. So when you move or look to remortgage, if you can afford higher monthly repayments, then look around at mortgages on a shorter term.”
Indeed, the study by Santander Mortgages found many of those who would consider taking out a 40-year mortgage were mindful of the importance of trying to reduce the overall cost. Twenty three percent would look to re-mortgage to a shorter-term if their finances improved, 37% would make overpayments when possible and a fifth would look to re-mortgage to a shorter term when they moved to a different house.
Paying a mortgage in your 70s and 80s?
If you’re looking into getting a 40 year mortgage, there’s more than just the increased interest costs to consider.
The average age of a first-time buyer in England is now 33 years old according to the English Housing Survey, up from 31 years old ten years ago.
So if you buy your first home at the average age of 33 and take out a 40 year mortgage, you’ll face working to pay if off until you’re 73 – and longer if you take it out later.
This could mean your retirement is delayed significantly. It may seem like a long way off in the future, but this is something you need to seriously consider.
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