Short-term affordability can be improved by extending the term of the mortgage, but be sure to reduce the term sooner rather than later.
Increasing numbers of lenders are offering mortgages over longer terms, but with the average age of the first-time buyer currently at 34, moneysupermarket.com asks how wise it is for first-time buyers to take on a longer term mortgage?
With the average house price now exceeding £175,000, a longer term mortgage may be one way for first-time buyers to get a foot on the ladder. While a longer term mortgage, e.g. 40 years as opposed to the usual 25 year term, may increase affordability in the short term, first-time buyers need to be aware it will increase the total cost payable over the term.
For example, a £166,250 mortgage on a £175,000 property (95 per cent LTV) would cost a first time buyer £109,168 more over a 40 year term, than if they had started on a 25 year term.
Tables showing total true cost of mortgages over various terms - All examples based on a first time buyer purchasing a £175,000 property, with a £166,250 mortgage (95 per cent LTV)
1. Two year fix over 40 year term — staying on the 40 year term reverting to SVR
Provider - Chelsea BS
Product - Fixed
Term - 31 July 2008
Rate - 4.39 per cent
SVR - 6.49 per cent
Initial Monthly Payment - £736
True Cost over 40 years - £412,040
2. Two-year fix over 40 year term — remortgage to 25 year term (i.e. 23 years left, reverting to SVR)
Provider - Chelsea BS
Product - Fixed
Term - 31 July 2008
Rate - 4.39 per cent
SVR - 6.49 per cent
Initial Monthly Payment - £736
True Cost over 2 yrs - £23,779
then £163,058 Remortgage on £175,000 Property
Provider - Yorkshire BS
Product - Fixed
Term - 30 June 2008
Rate - 5.09 per cent
SVR - 6.40 per cent
Initial Monthly Payment - £1,004
True Cost over 23 yrs - £283,081
Total Cost - £306,860
So, whilst longer-term mortgages may be cost-effective over the short-term, any borrower should look to reduce the term as soon as possible.
Louise Cuming, head of mortgages at moneysupermarket.com, said: "With an increased retirement age an all too real prospect, it may make sense for borrowers to consider increasing the term of their mortgage. However, few first-time buyers would be happy to picture themselves still saddled with a mortgage when they reach retirement age."
She continued: "In addition, any lender contemplating lending into retirement needs proof that the loan will still be affordable, which is likely to be difficult to confirm 50 years in advance. Obviously incomes will fall beyond retirement age and no lender will want to chase arrears from the more vulnerable elderly. In short, this means long-term mortgages can be pretty hard to come by."
Only two lenders actively promote the fact they will consider 50 year mortgages: HSBC, which does not publish a maximum age for repayment and RBS. Although the latter has a 50 year maximum term, it has a maximum age at planned redemption of 70 - so unless a prospective borrower is 20 or less, the maximum term is not available.
There is a wider choice of providers offering 40 year terms, such as Alliance & Leicester (max age 70); Chelsea BS (max age 75) — which means the maximum age first time buyers could take out one of these mortgages is 30 and 35 respectively — and also Halifax and Nationwide, neither of which publish a maximum age.
Louise concluded: "There is no excuse to remain tied to a longer term mortgage. It is not even necessary to remortgage to amend the term as lenders will reduce the term of a mortgage for existing borrowers with written authority. Just check if there is a charge. Either way, the message is to make sure your mortgage is amended to a shorter term sooner rather than later."
