Is this the end of 25-Year Mortgages?

In years gone by, the typical mortgage period that many home buyers agreed, was to make their repayments over 25-years. Now, however, with average house prices so high compared with earnings and such good mortgage interest rate deals on offer – not to mention a dearth of interest-only mortgages – more people are choosing to borrow for a longer term to buy the home they want.

The Bank of England’s (BOE’s) latest Financial Stability Report clearly highlighted the longer-term rise in mortgages with terms of over 25 years. The figures show that while in 2005 mortgages with terms of 35 or more years made up around 2.5% of all mortgages, by the first three months of 2017, this had risen to over 15%. At the same time, the proportion of home-buyers agreeing a mortgage of between 30 and 35 years, increased from around 8%, to 20%.

Affordability

As house prices have risen, earnings growth has remained stubbornly low, particularly since 2007. This discrepancy has pushed house prices further out of reach of most regular workers, earning an average wage.

In the meantime, the BOE’s financial stability arm has tightened mortgage lending rules and the affordability criteria that borrowers must meet has resulted in more home-buyers requiring a longer-term mortgage.

Taking a loan over a longer period has the effect of reducing the monthly repayments to a more affordable level.

mortgage graph

As this table published in the Guardian shows, you can save up to £200 per month on a repayment mortgage by increasing the repayment term by 15 years from 25 years to 40 years. However, the total amount of interest you repay to the bank rises considerably, too.

But, for those hard-working Britons who want their own home, this is often the only option.

Lower Interest Rates Soften the Blow

Right now, BOE interest rates remain ultra-low and mortgage interest rates with them. Even when the bank begins to raise rates, they won’t get anywhere near to the 4% level for years – if ever. This is good news for borrowers and has seen the introduction of many excellent rates for 10-year fixed mortgages.

The Telegraph recently reported the best 10-year fixed mortgages on the market were at 2.49% and 2.59%. from First Direct, Barclays and HSBC. Meanwhile, the BOE’s database shows the average 10-year fixed rate mortgage 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.

Of course, these rates will begin to creep higher, but if you keep a close eye on interest rates and mortgage rates through the term of your mortgage, you can borrow large amounts over the long-term for consistently affordable repayments.

But, lenders retain an upper age limit on borrowing, for the Halifax it’s currently 80, and this means that only someone applying for a mortgage at the age of 40 or under will be able to take secure a 40-year mortgage.

This means that even if house prices do rise significantly higher and earnings growth remains muted, 25-year mortgage terms will continue to feature prominently in the mortgage market – albeit a little less prominently than in previous years.