25-year mortgages no longer the standard

Lenders are increasingly offering mortgages with terms of up to 40 years, helping homebuyers on tighter budgets to get onto the property ladder.

Although 25 years used to be the standard term for mortgages, lenders with a maximum term of up to 40 years are becoming much more commonplace.

Many buyers prefer longer mortgage terms as they enable them to keep their monthly payments down. This can be a huge benefit for those who would otherwise struggle to afford a mortgage given high house prices in many parts of the UK, but it’s also important to consider the increased total cost of taking a mortgage over a much longer period of time.

Pros and cons of the 40-year mortgage

Longer mortgage terms of up to 40 years may allow homebuyers on limited incomes to meet lenders’ affordability criteria, due to the fact their monthly payments will be lower.

For example, someone borrowing £150,000 over 25 years at a rate of 2.5% would pay £673 a month for their mortgage. If they chose a 40-year term, their monthly payments would be £495, around £178 a month less.

However, longer term mortgages are not without their drawbacks. Although choosing a term that lasts several decades may mean less to pay each month, homeowners can end up paying thousands of pounds in extra interest over the mortgage term.

Based on the example above, a person borrowing £150,000 over a 25-year term would pay around £52,000 in interest.

If they chose a 40-year term, they’d pay almost £88,000 in interest - nearly £36,000 more overall.

Borrowers will also need to consider the fact that the longer the mortgage the older they will be when they pay it off. According to the latest English Housing Survey, the average first-time buyer is now aged 33, which means that opting for a 40-year term could mean taking that debt into retirement.

Options for those choosing longer term deals

Homebuyers who are concerned about taking out a 40-year mortgage because of the additional amount of interest they’ll pay can review and alter the term of their mortgage as their circumstances change.

If, for example, they receive a pay rise and can afford bigger monthly payments, they may decide at this point to remortgage to a shorter term.

Another way to reduce the overall amount of interest paid is to make overpayments, either regularly or on an ad-hoc basis, with most lenders allowing owners to overpay their mortgage by up to 10% each year without charge.

Being able to overpay gives a greater degree of flexibility than shortening the term, although it’s still important to re-assess when possible and look to pay off the debt quicker.