Long term mortgage borrowing reaches record high propelling property market fears to new heights
The number of mortgages with loan terms longer than 30 years that have been acquired by borrowers during the first quarter of this year has reached a record high, according to recent figures released by the Council of Mortgage Lenders (CML).
The CML reported that 13.7% of mortgage holders who took out a secured loan during the first quarter of this year will pay it back in 30 years or longer. This compares unfavourably to the equivocal pre-recession figure of 7.3% back in 2007, and highlights the growing apprehension amongst homeowners between soaring house prices and affordability.
Nearly one in eight secured loans that have been approved in the past year were longer than the typical 25 year term, the CML identified, indicating that house buyers are intentionally obtaining long-term mortgages so that that their initial monthly contributions are kept to a minimum whilst house prices soar.
Recent figures from Nationwide Building Society illustrated that house prices rose by 10.9% in the past year, which has considerably outstripped the growth in wages over the same period, which the Office for National Statistics estimated to be at 1.7%.
And the data has highlighted the growing apprehension amongst homebuyers about the affordability of mortgages, despite interest rates remaining at their historic low of 0.5% and an extended period of low borrowing costs since 2010.
Affordability difficulties grow
A CML spokesman highlighted that the new mortgage lending regulations, introduced on April 26th, has meant that people can no longer acquire mortgages on an interest-only basis, which means that people will now be subjected to far higher payments than they have done so in recent times.
He said: 'With house prices currently rising faster than incomes, affordability is still a stretch for those wishing to enter the market - even with low interest rates.
'Given the fact that many households will have worked hard to save for a deposit, it isnít surprising that households may choose to take out a mortgage with a longer term to cushion the cost of monthly payments at the outset ñ especially as interest-only mortgages are no longer being widely used now that the new affordability rules flowing from the Mortgage Market Review are in place.'
Under the Mortgage Market Review, UK lenders now have to analyse the finances of mortgage applicants far closer than they did before, so that they can clearly ascertain whether the borrower can afford to pay their monthly contributions when interest rates eventually do rise. Due to the substantially higher payments that would have to be paid by people who have an interest-only mortgage when rates do rise, lenders have stopped offering secured loans of this kind, and the recent surge in the number of long-term mortgage acquisitions is likely an intentional move by borrowers to try and lower the amount they pay each month on their housing.
Nigel Bedford, senior partner at Largemortgageloans.com, highlighted this point, arguing: ìWith interest-only mortgages harder to come by, and with affordability a bit tight, longer terms can make monthly repayments more manageable for borrowersî.
However, the reality is that long-term mortgages tend to necessitate a larger repayment sum over the entire loan term, suggesting that borrowers may be escalating their financial difficulties well into the future by trying to achieve a short term fix to their mortgage costs.
Mr Bedford highlighted the example of a £400,000 mortgage taken out with Halifaxís 2 year fixed rate deal at a 1.99%. Whilst the initial borrowing costs are relatively cheap, the deal then moves to a substantially higher 3.99% after the two year period comes to an end, meaning that the total repayment will be substantially higher than it would have been under the headline rate.
Thus, in the aforementioned example, the initial monthly repayments under a 25 year mortgage would stand at £1,694 whilst under a longer 40 year mortgage this would be a lower £1,210. However, the total repayment for the 40 year mortgage would be a substantial £780,816 whilst the equivocal figure for a 25 year mortgage would be a markedly lower £614,235.
ìBorrowers are best advised to keep their mortgage terms as short as possible, or to take longer terms with the opportunity to overpay monthly says David Hollingworth, associate director at London & Country Mortgages.
Things to remember for homebuyers
If you are someone who is seeking a mortgage at present, then you should keep in mind the long-term costs of acquiring a secured loan which has a repayment term over 30 years.
Whilst the initial repayments will be lower, the total amount repayable will be substantially larger than if you had obtained a 25 year mortgage, and could stretch your finances well into your retirement.
You will have to ask yourself whether you are prepared to risk your financial future on your property, which in the current market is an appreciating asset and will tempt a number of homeowners to hedge their long term finances, and perhaps even their retirement fund, on their homes.
However, the property market has always been characterised by inevitable crashes, and taking this line of action is highly risky because you could find yourself with a huge level of debt, contemplating retirement but having little value in your property to release in order to alleviate your problems.
The best course of action to take would be to take out a long term mortgage and capitalise on the initial low borrowing costs, so that you can make that transition into making regular monthly contributions. Once you believe you are comfortable with the payments you are making, it would be worth either looking to remortgage at a lower rate, or begin overpaying your mortgage so that the term is reduced.
Doing this will ensure that you experience the best of both worlds; cheap initial monthly contributions and a lower mortgage term in the long run so you pay less on interest.
Alternatively, you could wait until that time that you are fully confident that you can cope with making normal mortgage payments each month, and seek a shorter term mortgage when you can, as this will ensure that you are in good stead to have a stable and secure housing situation in the future, rather than throwing yourself to the wolves in the future when you near your retirement, by which time you will likely want to remove yourself from financial instability and the burden of debt.
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