30 Year Mortgage – Should you have one?

30 year mortgage – Should you borrow for more than 30 years to get on the property ladder?

Gone are the days of a standard 25 year mortgage. These days longer term mortgages are helping first-time buyers get onto the property ladder by taking their mortgage for 30 years or more.

This is becoming an attractive option to secure a property – but could leave you paying far more for your home.

Additionally, with the average age of a first-time buyer now at just over 30, many borrowers could end up saddled with mortgage debt well into their retirement.

The rise of longer term mortgages

Rising life expectancies and tougher mortgage lending requirements have led to a rethink of how mortgages are structured. Many borrowers opt for longer terms to satisfy tougher affordability tests and income requirements from lenders.

They are also being helped by the end of the default retirement age and banks and building societies starting to reconsider their upper lending limits. Only the other week Halifax and Nationwide Building Society relaxed their upper lending limit to age 80 and 85 respectively.

Borrowers typically take out a mortgage over 20 to 25 years, but according to the Council of Mortgage Lenders, 60 per cent of first-time buyers now take out a home loan for more than 25 years.

Lending data from Halifax shows that in 2010, nearly 32 per cent of mortgages were for between 21 and 25 years. This fell to 27 per cent last year. Over the same period, home loans of between 26 and 30 years in term went from 15 per cent to 21 per cent of lending.

On paper longer term mortgages look attractive. You can lower your monthly repayments by paying over a longer period. But as you are paying for more years, the overall cost is higher.

The average mortgage rate on a loan with a 25 per cent deposit in March was 1.87 per cent, according to the Bank of England. A £150,000 mortgage over 20 years would cost £749 p.m. and a total of £179,990 over the term.

But if you increase the term to 35 years, monthly repayments fall to £486. As you are paying for longer, the total repayment increases to £204,517, meaning that you will be paying an extra £24,527.

Some lenders will even lend over 40 years. A £150,000 home loan for this period would cost £444 p.m., but a total of £213,140 over the term. That is an eye watering £33,150 more than the 20-year term.

Taking out a longer mortgage is often the only way for some people to get on to the property ladder. For many people who would otherwise only afford to keep renting, taking a 30 – 40 year mortgage term is the way to keep their monthly payments affordable.

Post courtesy of This is Money.