Most lenders now offer mortgages with 40-year terms and, if managed smartly, they can offer a flexible way for borrowers to get on the property ladder.
Even though the prospect of paying off a mortgage for the next 40 years could feel demoralising, these longer-term mortgages can make buying a home more affordable for borrowers.
For example, borrowers could save £255 on their payments each month by choosing a 40-year mortgage term instead of a 25-year term, based on analysis by Moneyfactscompare.co.uk, (when borrowing £250,000 at the Moneyfacts Average Mortgage Rate of 5.05%).
Almost two-thirds (61%) of would-be first-time buyers said that affording the mortgage payments was a significant obstacle to buying a home, according to the latest Property Tracker survey from the Building Societies Association (BSA), so a longer mortgage term (and lower monthly payments) could help to make the dream of homeownership a reality.
“A maximum mortgage term of 25 years would have been relatively standard in the past, particularly when house prices were lower, but the majority (68%) of first-time buyers are now taking out mortgages with a term of 30 years or more, according to the Financial Conduct Authority (FCA),” commented Rachel Springall, Finance Expert at Moneyfactscompare.co.uk.
She adds that as consumers continue working (and earning) for longer and are retiring later, “it’s easy to see why the majority (85%) of mortgages allow them to push their term to 40 years”.
However, even though it can improve affordability, the downside to a longer mortgage term is that borrowers will need to make their payments for longer and will pay more interest overall. This is why, if borrowers can afford to do so, it’s a good idea to make overpayments on their mortgage.
Overpay to save thousands on your mortgage
Paying more than your monthly mortgage repayment could save a life-changing amount of money in interest.
For example, borrowers with a 40-year mortgage who overpay by £200 every month could save more than £123,000 overall.
This could also cut almost 13 years off the mortgage term, which means a first-time buyer aged 32 who took out a 40-year mortgage could have repaid it in full before they turn 60, instead of paying it until they’re 72 years old.
While borrowers could simply take out a shorter mortgage term and commit to higher monthly payments from the beginning, they have to be certain that they can afford these higher payments otherwise their credit score and finances could be affected.
By contrast, choosing a longer term offers more flexibility as borrowers are contractually obliged to make smaller monthly payments and any overpayments are optional. So, if you have an unexpected expense one month and can’t afford to make your usual overpayment, there will be no consequences, as long as you make the agreed payment.
Bear in mind that most lenders allow you to overpay up to 10% of your outstanding mortgage balance each year without any extra charges. Always double check if any early repayment charges will apply before making an overpayment.
