Should I take my mortgage over a longer term?
As inflation soars and people struggle with higher living costs, many are having to make tough financial choices to make ends meet and progress in their lives.
One area where this is particularly apparent is in the mortgage market, as consumers are increasingly opting to sign up for marathon loans over up to 40 years. According to figures from UK Finance, 18 per cent of all first-time buyer mortgages had a term longer than 35 years in February 2023 – up from eight per cent a year earlier. Similarly, the number of 30- to 35-year mortgages has risen from 34 per cent to 38 per cent over this period.
Why is this happening and what are the implications?
Well, the most obvious reason for taking out a longer mortgage term is that it can mean lower monthly repayments – a crucial factor at a time when inflation is at a 40-year high. And for first-time buyers, that may be what it takes to realistically afford to get on the housing ladder during the current financial climate. However, many people choosing longer mortgage terms could still be storing up problems for the future. For example, they could end up paying a lot more in interest.
Of course, property buyers are looking for practical ways in which to achieve their lifestyle goals, while still managing their budget in a difficult economic environment. But taking out longer-term mortgages to get on the property ladder can end up being much more costly in the long run, and therefore a false economy. You may also run the risk of reducing the amount of equity you can build up in your property, which may again have long-term consequences.
Furthermore, if you’re taking out a very long mortgage, you’ve got to consider what you’re likely to be doing at the time the mortgage term ends. For example, if you’re a middle-aged or more mature borrower, your loan term may extend well into your retirement, in which case you’ll have to demonstrate to a lender that you’ll have the means to continue repaying when you’re no longer working. If you haven’t got a repayment plan in mind, you could end up relying on your pension funds and other assets, and therefore having much less money to live off in retirement.
Of course, the alternative to buying a property right now is trying to find rental accommodation, which, as many will attest, is far from easy right now. Many parts of the country are experiencing a shortage of suitable homes, which has exacerbated already soaring rents as prospective tenants compete for properties.
All things considered, if you are really determined to get on the property ladder and take out a mortgage, it’s well worth taking professional advice to be sure of getting a home loan that suits you and your circumstances. And crucially, a specialist in this field will consider your long-term financial goals, so you aren’t hit with nasty, unexpected surprises in the future.
If this has got you thinking, we’d be delighted to help. Get in touch and we’ll be help you understand what’s possible, or sign up to our monthly newsletter, to keep your finger on the pulse.
Sam Murphy – 3rd August 2023
Sources
https://www.theguardian.com/money/2023/apr/22/mortgages-40-years-uk-first-time-buyers