The rise of the 40-year mortgage: what does it mean for house prices?

House prices are soaring. To help with affordability, some lenders now offer ultra-long mortgage terms. But does this simply inflate prices?

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With house prices continuing to head upwards, mortgage lenders are getting more creative to attract struggling buyers. One method currently being used is expanding the availability of longer mortgage terms, well beyond the typical 25 years.

So does this new trend offer hope for first-time buyers? Or do longer mortgage terms simply stoke the house price inflation fire? Let’s take a look.

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[top_pitch]

What is happening with house prices?

According to the latest stats from the Office for National Statistics (ONS), average house prices have risen by almost £30,000 over the past year. The average house price now stands at a colossal £270,000.

This means that buying the average house now costs more than eight times the UK’s average salary of £31,285. To further highlight the plight of budding first-time buyers, ONS figures also reveal that house price growth has significantly outpaced the rise in average earnings for the past 20 years.

While the government has a number of schemes available to help first-time buyers get on the property ladder, there is a wide belief that they do little to address current supply issues. Plus, some even feel that house prices would be lower without any Government help at all.

For example, according to estate agents Moving City, the government’s Help to Buy scheme was shown to ‘significantly’ contribute to house price inflation following its launch. 

What’s the deal with 40-year mortgages?

Towards the end of last month, Kensington Mortgages and Rothesay teamed up to start offering a 40-year mortgage. The ‘Flexi Fixed for Term’ mortgage allows borrowers with a 40% deposit to fix at 3.34% for four decades.

While 40-year mortgages have been offered by other providers, including Nationwide and Santander, Kensington’s new offering shines the light on the fact that longer mortgage terms are becoming more popular.

It’s worth knowing that while many providers offer 40-year mortgages, they remain uncommon. That’s because, aside from poorer rates compared to shorter terms, many banks restrict ultra-long lending to younger borrowers. For example, both Nationwide and Santander limit their 40-year products to those aged 35 or under.

[middle_pitch]

How can longer mortgage terms impact house prices?

While some may feel that 40-year mortgage terms can give first-time buyers a much-needed lifeline, others are keen to highlight that these products make houses even more expensive, given the fact that longer mortgages are cleared at a slower rate than typical terms.

As David Hollingsworth, associate director of communications at L&C Mortgages, explains, “Structuring a mortgage over a longer term than the once traditional 25 years will reduce the monthly outgoing and therefore appeals to those that want to build in a bit of breathing space in their monthly budget.

“However, the downside is that the longer repayment period means that you eat into the debt more slowly and end up paying potentially tens of thousands of pounds more versus a shorter term.”

While Hollingsworth admits 40-year terms can help with affordability, he says they shouldn’t necessarily be the first port of call. He explains, “Whilst [40-year terms] can help from an affordability perspective, in the early stages it’s important to keep reviewing that approach.”

It should be noted that one reason behind high house prices is the availability of cheap credit. Therefore, longer mortgage terms may lead to higher house prices. That’s because their introduction increases the number of people able to afford a home. This essentially creates greater competition for the UK’s finite supply of housing stock, pushing up prices. 

In other words, making house prices more affordable, without addressing supply issues, can lead to higher house prices.

Will house prices crash in 2022? If you’re looking to buy a home, see our article that explores whether house prices are likely to crash in the near future.

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