Beware the Dangers of the 35-Year Mortgage

Think of mortgage terms and the average 25-year mortgage will probably come to mind. But things could be changing – and mortgage experts are warning the changes may not be good in the long term. The housing market has seen numerous changes recently. Stricter affordability rules have made it harder for many buyers to get onto the housing ladder. Additionally, rising house prices and stagnant wages have meant many cannot afford the mortgage payments on the usual 25-year mortgage term. Even with the incredibly low rates currently available, some are still finding it hard to get onto the housing ladder, or to move up the next rung. It should come as no surprise then to learn more people are opting for longer terms. Data from the Bank of England has revealed 15.75% of new mortgages agreed in the first three months of this year were for terms of at least 35 years. When data was first collected in 2005, the percentage of mortgages lasting this length of time was just 2.7%. It hit a high of 16.36% in the final quarter of last year, but the overall trend since 2006 has been for longer terms – those of 30 years and up. Meanwhile, the usual 25-year term is becoming less appealing. Will the trend continue? “It’s easy to see why this trend has developed,” said Darren Pescod, CEO of The Mortgage Broker Ltd. “People want to buy their own property, but they’re finding it increasingly hard to afford to do so. There is some speculation we’ll see house prices beginning to fall soon, but this is uncertain, and even if it does happen, it may not happen to a large degree. “Additionally, people see longer mortgage terms as a good way to reduce their monthly mortgage payments. Of course, if you extend the mortgage term, you also increase the amount you’ll pay back over that term. People may end up paying around 20% more over that period. It also raises the question of how someone will continue to pay a mortgage once they retire. These are all things people must consider before taking out a mortgage with a longer term.” Eating into post-retirement income It is easy to understand why people who are strapped for cash would reduce their monthly mortgage payments by extending the mortgage term. However, this does have the potential to create problems in the future. If the term ends once the borrower is retired, the monthly payments will need to come from their retirement income. While this is too far in the future for many people to think about now, it is something that should not be ignored. Planning for the future is vital, and this applies just as much to mortgage payments as anything else. There is some concern that lenders could focus too heavily on longer terms and thus create problems that will only be seen in the future. This is one story that is unlikely to end anytime soon.