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Taking out a mortgage was never meant to be a life sentence, but increasingly it can feel like one. As first-time buyers get on the property ladder later in life and have to borrow ever greater sums to afford today’s sky-high prices, paying off the debt in the traditional 25-year timeframe is an increasingly tall order.
Growing numbers simply cannot do it.
The result is a major change that has hardly been commented on – the 25-year mortgage term is now being stretched to a whopping 40 years.
That’s four decades!
Today, more than half of all new mortgages come with a 40-year term as standard; this number is up a third in the last five years, according to Moneyfacts.
Borrowing over a longer term allows buyers to meet lenders’ increasingly stringent affordability criteria. Your initial payments will also be lower, making a 40-year term look more affordable than a shorter one.
It looks like an easy fix, but, as ever, there is a price to pay…
You pay a lot more interest
Your initial payments will be much lower, but, since payments will be spread over a far longer period, you will pay a lot more interest in the end.
For example, somebody who takes out a £150,000 capital repayment mortgage at 3% over 25 years will pay £711 a month, with interest over the term totalling £63,358.
Borrowing that £150,000 over 40 years instead of 25 will cut your initial monthly repayments to £537, saving you a useful £174 a month at a vital time in your life. However, it will increase the total interest bill over the lifetime of the deal to £107,686 – an additional £44,328.
The difference in total interest is massive – you are paying almost 70% more.
Debt in retirement
There is another danger. The average first-time buyer is now 33 years old, the annual English Housing Survey shows. If you take out a 40-year mortgage at that age, you will be on course to clear it at the age of 73.
More people will be heading towards retirement with unpaid mortgage debt, especially since many will want to remortgage to fund their ascent up the property ladder.
You can’t, however, take out 40-year deals indefinitely, as many lenders don’t like terms running beyond age 65 or 70.
Pay that debt down!
Now, all this doesn’t mean you should shun a 40-year mortgage altogether. It may be the only way you can get a home of your home.
So consider doing this. If a 40-year term is the best way to secure your first mortgage, take that deal. Then when your finances are in a better place, start paying the debt down.
Most mortgages allow you to overpay up to 10 per cent of your balance each year without penalty. Overpayment will reduce the debt and the total interest you pay, while you avoid the extra pressure of committing yourself to higher monthly repayments.
The 40-year mortgage can work in your favour, but only if you do not actually let it run for 40 years.
Finally, remember that you also have to invest for your future, for example by setting up a Stocks and Shares ISA. It’s a tricky balance to get right.
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