New figures suggest that the traditional 25-year mortgage is becoming a thing of the past. More than half (51%) of those on sale have a standard maximum term of up to 40 years, according to the financial data website Moneyfacts – up from 36% in 2014. But is the 40-year mortgage a nifty way for desperate buyers to get on to the housing ladder – or a financial life sentence?
High house prices, escalating student debt and a rise in both the age at which couples have children and life expectancies are contributing to many people buying a home later and opting for a longer repayment term – even if it means they will be paying it off long after they have started collecting their pension.
There is one very big, obvious advantage to stretching the term of the loan: it brings down your monthly mortgage payments. That can seem very attractive, and for some people it may be the only way they can afford to get on to the property ladder at all. For example, someone who takes out a £200,000 repayment mortgage at a rate of 2.5% could expect to pay £897 a month if they go for a 25-year term. But that falls to a much more affordable £659 a month if they agree to sign up to a 40-year term, said Moneyfacts.
However, there’s a big catch. Your monthly outlay might be lower with the 40-year deal, but by the time you get to the end of the term you will have paid out far more – probably tens of thousands more – than if you had opted for the standard 25 years. In the above example, you would hand over more than £47,000 extra in interest (£116,000 instead of £69,000) if you chose 40 years rather than 25.
But while opting to “go long” on your mortgage could prove a costly decision, even 40-year terms are modest by some international standards. More than a decade ago, a California-based financial firm launched a 50-year deal that was dubbed “the Methuselah of mortgages”. And in Japan in the 90s, rocketing property prices led to the development of 100-year mortgages, designed to be paid off by the borrower’s children and grandchildren.