Affordability challenges prompted a fifth of first-time buyers to opt for a mortgage term of 35 years or more in Q4 of 2023 according to a report from UK Finance, twice as many as the year before.

A longer mortgage term might seem attractive at first glance, but there’s a hidden catch. Let’s look into it.

 

A longer mortgage term could reduce monthly repayments, but...

This is the main draw of a longer mortgage term for first-time buyers. Borrowing a large sum of money and opting to spend more time paying it back means your monthly repayments will probably be lower.

 

If you borrow £200,000 through a repayment mortgage with an interest rate of 4.5% and a term of 25 years, your monthly repayment would be around £1,111. Repaying the same mortgage over a 35-year term would reduce your monthly repayments to £946.

 

That might seem attractive at a time when costs are rising and household budgets are being squeezed, but changing market conditions have negated the short term benefits of longer mortgage terms for many first-time buyers.

 

The UK Finance report shows that, in 2022, the average term for a first-time buyer’s mortgage was 30 years. To achieve the same level of affordability a year later, they needed to borrow over a 50-year term due to changes in house prices, mortgage rates and incomes. By the end of 2023, first-time buyers needed a mortgage term of 72 years to achieve the same affordability as 2022. UK Finance noted: “a 50-year term, let alone 72 years, sits outside even the most generous of lender underwriting criteria.”

 

Most lenders allow some borrowers to stretch their mortgage term to 35 years, and some even offer 40-year terms. But these lengthy terms can run into other conditions. Many lenders, for example, will want the term to end before you retire.

 

A longer mortgage term could cost thousands more in interest

Focusing on the reduced short-term costs of a longer mortgage term can distract us from the creeping downside of this approach: higher interest over the lifetime of the mortgage. It’s likely that you’ll pay much more interest over the full term because interest is added to the outstanding debt every month and you’re spending more time paying off your mortgage.

 

That £200,000 repayment mortgage from earlier with an interest rate of 4.5% would cost you around £133,370 in interest over a 25-year term. If you repaid the same mortgage with the same interest rate over 35 years, you’d pay around £197,337 in interest - almost £64,000 more.

 

You can often change your mortgage term when your initial deal expires. You might choose a longer term when you buy your first home to help manage your budget and then shorten it in the future as your finances improve.

 

It’s important to note that the interest rate on your mortgage is likely to change too. You might find that you can secure a more competitive interest rate as you gain more equity in your property, which would reduce your repayments. So, the more you pay off your mortgage the easier it becomes to repay in full.

 

We can help you find the right mortgage

Get in touch if you’re a first-time buyer with questions about your mortgage. We can walk you through the pros and cons of different terms, answer any questions you might have about the application process, and offer you guidance about which mortgage can help make your dreams of home ownership a reality.

 

 

Approved by The Openwork Partnership on 14/07/2024

 

Expiry 14/07/2025

 

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