Taking the first step onto the housing ladder is not as easy as it once was. 100% mortgages have disappeared and although a couple of lenders still offer 95% loan to value mortgages the more usual scenario is typically 80% or 75% loan to value. This can equate to a hefty deposit which is why 84% of all first time buyers under the age of thirty are reliant on parental help to swing the deposit. The average deposit now required is a massive £34,000, reducing the number of first time buyers as they save to amass the deposit needed.
Mortgage lenders have now been criticised by the FSA for the imprudent practice of issuing interest only mortgages without necessarily seeing an investment plan in place to clear the loan at the end of the term. Now some mortgage lenders are breaking with another traditional practice, that of offering 25 year mortgages, and extending terms up to 40 years. Those who are eager to get that first foot on the property rung may be tempted by these longer terms now being offered, but just how much thought goes into taking them?
Ideally the mortgage issuer hopes that at some point the borrower will remortgage or reduce the term of the mortgage to a shorter period, but it is not a contractual obligation. Many assume a mortgage and struggle when interest rates rise resulting in higher monthly payments. The idea of borrowers suddenly being able to decrease the term and increase their payments is not necessarily a realistic one.
There are many drawbacks to such long term mortgages, not least the fact that the interest payments on a 40 year term will be almost double of those on a 25 year term. Many may intend to reduce the term and be unable to do so, thus facing the prospect of paying a mortgage in retirement when income is generally much lower. One can imagine the future scenario when a whole generation of pensioners have their homes repossessed after paying the mortgage for 35 years, because they can no longer make the payments. The likelihood is that the terms will need to be extended still further to avoid this.
Logic says if a buyer cannot afford the terms of a 25 year mortgage then they really can’t afford to be entering the housing market. It makes no financial sense to be saddled with a 40 year mortgage which will mean so much more of ones income servicing interest rather than being invested for retirement. With a loan extending for 40 years there is far more chance of illness or other reasons causing the mortgage to fall into arrears and thus the risks of losing ones home increasing.
Ideally buyers should look at the shortest mortgage terms they can afford rather than the longest. It makes more sense to save and wait until a 25 year term is affordable, than leap into a 40 year mortgage which will cost so much more in the long run.