Mortgage terms are getting longer

Mortgage terms are getting longer
First-time buyers are increasingly taking out mortgages with terms much longer than the usual 25 years to help make their monthly payments more affordable.

According to a recent bulletin on mortgage trends from the city regulator the Financial Conduct Authority, 39% of new loans in 2016 had a term longer than 25 years, up from 17% in 2007.

Separate research from L&C found that the number of first-time buyers taking out mortgages with terms from 31 to 35 years has doubled over the past decade.

The average mortgage term taken by a first-time buyer is currently 27 years, with 22% of first-time buyers opting for mortgage terms of 31 to 35 years, up from 11% in 2007.

Why mortgage terms are increasing

Steep property prices in many areas of the UK mean first-time buyers often have to save up large deposits if they want to get on the property ladder, which can place extra pressure on already squeezed incomes.

As a result, many are looking for ways they can reduce monthly outgoings, with longer mortgage terms offering one solution. Previously first-time buyers might have turned to interest-only mortgages to keep payments down, but very few lenders now offer this type of deal.

Only 4% of new loans in 2016 were interest-only, according to the FCA, down from 32% in 2007.

Pros and cons of longer mortgage terms

Opting for a longer mortgage term means your monthly payments will be lower than if you’d chosen a shorter mortgage term.

For example, if you took out a £150,000 repayment mortgage at an interest rate of 2.5% over 35 years, monthly payments would cost £536. The same mortgage taken out over a 20-year term would cost £795 a month.

However, the downside of opting for a longer mortgage term is that you will end up paying much more interest overall. Based on the example above, you’d pay a total of £75,221 in interest if you chose a 35-year term. If you chose a 20-year term, however, total interest costs would be almost half this at £40,764. Therefore, the shorter the term you choose, the more money you will save, even though your monthly payments will cost more.

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