The needs of first-time buyers, Help to Buy borrowing, and changing income structures are all driving the growth in longer mortgage terms, brokers have told Mortgage Solutions.
The past five years saw a rapid increase in the number of borrowers taking out 40-year mortgages, new figures from Moneyfacts revealed.
The research showed 50.89% of all residential mortgage products currently available have a standard maximum mortgage term of up to 40 years, up from 35.93% five years ago.
Today there are 2,604 mortgages with a maximum term of 40 years compared with 1,096 in March 2014. At that point, 35-year deals were the most popular residential mortgages and accounted for 36.66% of the market. They have continued to increase in popularity to 43.40% today but they have been eclipsed by 40-year deals.
The most significant decrease has been for 30- and 25-year mortgages, dropping from 19.87% to 2.74% and from 7.54% to 2.97% respectively.
Fitting Help to Buy borrowing
Speaking to Mortgage Solutions, Greg Cunnington (pictured), director of lender relationships and new homes at Alexander Hall said: “I can understand why an increase in longer terms has raised some eyebrows in the industry. With mortgage rates as low as they are, it is an opportune time for clients to take as low a repayment term as is affordable and accelerate the repayment of the mortgage.”
“However, there are circumstances that mean a longer term is the best recommendation for some clients. A good example of this would be Help to Buy where the longer the mortgage term the greater the borrowing ability on the Help to Buy calculator, meaning we see circumstances where selecting a 40-year term is the only way for a client to get their dream property.
“This is something I would like to see Help to Buy and lenders have more communication on. If a client works for a lender’s affordability measures it would be great to see Help to Buy follow this when it comes to mortgage term.”
Changing income structure
Cunnington also linked the desire for lower initial payments to the changing nature of borrowers’ work and incomes.
“The number of clients with fluctuating income structures – be that bonus, commission, overtime, contractors or self-employed clients – is constantly increasing,” he said.
“Some of these clients like the flexibility of a lower set payment. Most first-time buyers in particular are not at a loan to value where an element of interest-only is possible, and so set things up with the lowest initial payment.
“This is where the need for an adviser is apparent as the adviser will ensure that, throughout the lifetime of the mortgage, its suitability is reviewed and amended if necessary.”
Understand the interest
Andrew Montlake, director at Coreco, agreed: “As long as borrowers take proper advice, and understand the difference between how much interest they’ll pay on a 40-year mortgage as opposed to a 25-year deal, then that’s fine,” he said.
“A lot of borrowers’ lives will change and they’ll be able to make bigger payments in due course.
“A long term deal can be a means to an end when starting out. What’s important is that borrowers take appropriate advice when it comes to remortgaging instead of blindly pushing the button on a product transfer.”