For a long time the traditional length of a UK mortgage has been 25 years, but runaway house prices and, more recently, dramatically higher borrowing costs are prompting more and more people to “go long” on their home loans.
On Monday, the former pensions minister Steve Webb revealed that younger homebuyers were increasingly being forced to gamble with their retirement prospects by taking on ultra-long mortgages lasting beyond the end of their working life.
The ex-Liberal Democrat MP published data obtained via a freedom of information request indicating that in the past three years, more than 1m mortgages that stretch beyond the current state pension age have been taken out.
Webb tabled the request in response to a recent report from the Bank of England’s financial policy committee (FPC) that revealed that almost half of all new mortgages issued in the final three months of 2023 were for terms of 30 years or more.
Separate figures from the lenders’ trade body, UK Finance, show that by the end of 2023, almost one in five first-time buyers were arranging their mortgage over 35 years, compared with fewer than one in 10 a year before. And while in 2005 the typical mortgage term for a UK first-time buyer was 25 years, that had crept up to 30 years by mid-2022.
Ray Boulger of the broker John Charcol says the traditional quarter-century term was chosen because until about the year 2000 most mortgages were linked to an endowment policy, for which 25 years was considered the optimum period.
Now that more than 90% of house purchase mortgages are taken out on a repayment basis, “there is no logical reason for the default period of a repayment mortgage to be 25 years or, indeed, any specific term,” Boulger says.
Affordability pressures
The key driver for longer terms is affordability: stretching out repayments over a longer term reduces how much you have to hand over each month.
In the UK, high house prices, escalating student debts and a rise in the age at which couples have children have contributed to the need for a longer repayment term.
“But what I think has helped to accelerate that [demand] more recently is the fact that interest rates are that much higher now,” says David Hollingworth of the broker L&C Mortgages. “You were getting people going beyond the traditional 25 years, but they would be perhaps sitting at about 30. We are starting to see the proportion going to the full 40 beginning to edge up – so, maxing it out effectively.”
Someone who takes out a £200,000 repayment mortgage at a rate of 4.5% could expect to pay £1,111 a month on a 25-year term. Tweak that to 30 and it falls to £1,013 a month. At 35 years it is £946, and at 40 it is £899 – £212 a month less than if they signed up for 25 years.
For would-be borrowers who cannot raise the mortgage they want on a shorter term, increasing the length of their loan may be their only option.
45-year loans
In March, UK Finance gave a graphic example of how affordability pressures have ratcheted up as interest rates and house prices have risen.
It looked at a typical first-time buyer in 2022, when the average mortgage term for someone stepping on to the property ladder was 30 years. By the middle of 2023, for that buyer to achieve the same affordability – as measured by their monthly payments compared with income – they would have needed to borrow over a 50-year term. By last December, rising mortgage rates had pushed this to 72 years.
“A 50-year term, let alone 72 years, sits outside even the most generous of lender underwriting criteria,” UK Finance was quick to add.
Banks and building societies have, though, made it easier for people to tie themselves into ultra-long mortgages. The financial data provider Moneyfacts said that at the end of April this year, 79% of residential mortgages on sale had a maximum term of up to 40 years – up from 68% in August 2023, and 57% a year earlier.
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One specialist player, Vida Homeloans, recently made the move to 45 years, and others could follow. Perenna, a new lender that launched its products late last year, originally offered deals lasting up to 30 years, but now offers a maximum of 40. Arjan Verbeek, its chief executive, says it has seen “very strong demand”, adding: “We will go to 50 if there is … need.”
It is not just first-time buyers opting to go long – large numbers of people facing much higher monthly payments once their existing deal expires have also extended the length of their mortgage term or are considering doing so.
Sting in the tail
Going for a longer term could lower monthly costs, but there is a financial sting in the tail: the longer you draw out the repayments, the more interest you will pay over the life of the mortgage.
For the £200,000 mortgage mentioned above, while over 25 years the borrower would pay £133,000 in interest, over a 40-year term, their total interest bill soars to £231,000.
And policymakers clearly have concerns about the growing popularity of marathon mortgages and the potential risks they pose for financial stability. People are potentially saddling themselves with a big debt that some will probably still be paying off long after they have started collecting their pension, or would have hoped to retire.
The FPC warns that this trend “could affect future borrower and lender resilience”, adding that longer terms means “a higher risk of debt being pushed into old age” and reduced financial flexibility. That, in turn, could make borrowers “more sensitive to negative shocks”.
On top of this, traditionally, you might have reached your early/mid/late 50s and either have paid off your mortgage or certainly broken the back of it – thereby giving you a few valuable years during which you could shove as much money as possible into your pension to boost your future retirement income. For many, that window of opportunity has now closed, or is likely to close.
A short-term fix?
There has already been an increase in the number of people in their 60s and 70s using equity release schemes to pay off their mortgages. On the other hand, some of those signing up for longer-term mortgages will find their financial situation improves over time, allowing them to bring the term back down or make overpayments to reduce what they owe.
Boulger says the fact that a 35- or 40-year mortgage might end up being more expensive does not necessarily mean there is anything wrong with a longer term if it is the best means to the desired end of owning your own home. “It will usually be better than renting for your whole life, including in retirement, and in any case very few people will keep the same mortgage for the whole term, and so in reality only a tiny proportion of 35- to 40-year mortgages will actually last that long,” he says.
In July 2022, it was reported that longer-term mortgages were being considered by the then prime minister Boris Johnson as a way to tackle the housing crisis. Ironically, the mess made of the economy by his successor Liz Truss – whose September 2022 mini-budget lit the touchpaper for much higher mortgage rates – could actually help make half-century home loans a lot more likely.
