In the past, 25-year mortgage terms were the norm, but new Government figures show that more than half of first-time buyers are taking out mortgages of 30 years or more.
Facing increased house prices and more stringent affordability checks, the number of first-time buyers taking longer-term mortgages to reduce monthly repayment costs has increased by 40% according to the English Housing Survey.
The change has come about quite quickly. Today, 42% of first-time buyers have a mortgage term of 20-29 years, a drop of 6% since 2016 when over half chose a mortgage on the same terms.
“The rise of longer mortgages is an unintended consequence of the FCA’s mortgage affordability rules, which ensure people could afford their monthly repayments if interest rates rise. We are seeing a lot of movement towards 30-plus year mortgages,” said Daniel Hegarty, CEO of online mortgage firm Habito.
Adjusting the mortgage term?
Lower monthly mortgage commitments will help many first-time buyers get on the property ladder, but they would be wise to consider overpaying while rates remain low. Paying a little extra each month would mean having a lower outstanding balance if rates rise in the future, and making higher repayments will knock years off a mortgage term and possibly save thousands in interest payments.
A first-time buyer taking a £300,000 mortgage over 30 years, on an average rate of 4.09%, could pay off their debt four years early and save £35,260 in interest payments by overpaying their mortgage by £200 per month. If that is unrealistic, a minimal £25 overpayment can still reduce a mortgage term by seven months and save £5,737 in interest payments, according to the moneysavingexpert.com overpayment calculator.
While longer-term mortgages are becoming the norm, first-time buyers would be well advised to factor in their mortgage overpayment facility and use it to their advantage, saving money and being mortgage-free earlier than expected.
