Should you mortgage for life?
Taking on a mortgage has always been a big commitment but it was never meant to last a lifetime.
For growing numbers of borrowers, young and old, taking out a new mortgage really is starting to look like a case of 'til death us do part.
The traditional 25-year mortgage just doesn't give many people enough time to pay off the debt, given how much they have to borrow to keep pace with today's spiralling housing market.
With house prices in England and Wales hitting a record post-financial crisis high of £181,619 in June, and £481,820 in London, according to official Land Registry figures, people are forced to borrow ever larger sums to keep up.
Worse, first-time buyers are getting on the property ladder at later and later ages, giving them less time to pay down the mortgage debt they accumulate, especially if they want to trade up to a larger family property at some point.
Many younger borrowers fear the only way they can afford to get on the property ladder is to take out a supersized mortgage that runs on and on.
Around half of 25- to 34-year-olds now say they may need a mortgage that lasts into retirement, according to research from the Building Societies Association (BSA).
Paul Broadhead, head of mortgage policy at the BSA, says: "As the average age of a first-time buyer increases, borrowing into retirement is becoming the new normal."
Unpaid mortgage debt is a growing problem for older people too, according to equity release specialist adviser Key Retirement. One in four of its customers aged over 55 is looking for ways to clear mortgages that they can't pay off from their income.
The traditional 25-year mortgage is looking increasingly obsolete but you have to pay off the debt some time. So what are your options if you want to end your days blissfully mortgage free?
The number of people taking out mortgages with longer terms than 25 years is growing rapidly. Between April and June last year, 28% of first-time buyers took out a home loan lasting 30, 35 or 40 years, according to the Council of Mortgage Lenders. That is up a third on the same period in 2010 when the figure stood at 21%.
Older borrowers are following suit, with 12% of home movers taking out loans for 30 years or more, up from 5% in 2010.
David Hollingworth, a broker at London & Country Mortgages, says if you want to stretch your mortgage term beyond 25 years, most lenders will be happy to oblige. "The majority allow a mortgage to run for 35 years – for example NatWest – while Nationwide and Halifax stretch their mortgages to 40 years."
The main benefit of taking a longer term is that it trims your initial repayments. If you took out a £150,000 capital repayment mortgage over 25 years at a rate of 3.50%, you will repay roughly £751 a month, Hollingworth says.
Extending the term to 30 years would cut your payment to around £674, a saving of £77 a month, or £924 a year. Stretching it even further to 35 years would cut your monthly payment to £620, while a 40- year term would shrink it to £581. So adding another 15 years to your mortgage term would save £170 a month or £2,040 a year.
Hollingworth says: "These are significant monthly reductions that could certainly appeal to a first-time buyer wanting to make the leap on to the property ladder, without overburdening themselves every month."
You can always trim the term by making overpayments later, when you may have more money to spare. But if you don't, you could be adding tens of thousands of pounds to the total cost of your remortgage payments.
The total interest paid on that £150,000 loan over 25 years is £75,282, on top of the capital repayments. Over 30 years, the interest bill increases to £92,485, an extra £17,203, and the bill keeps rising the longer your mortgage runs. Over 35 years, the total interest increases to £110,375 and over 40 years it totals a whopping £128,923. So adding 15 years to your mortgage term will cost you an extra £53,641 in total interest repayments.
Hollingworth says: "That may be a compromise worth taking if you restructure at a later date to reduce the term but, generally speaking, the best approach is to keep the term to the minimum that you can manage."
Interest-only versus longer terms
Before the financial crisis, many borrowers used interest-only mortgages in a bid to keep their monthly payments down.
Stretching the term is a better alternative, Hollingworth says. "At least you are repaying some of the capital, albeit at a slower rate but that is better than not repaying the debt at all."
Simon Checkley, managing director of mortgage broker Private Finance, says the extra interest may be a price worth paying. "Many people will see this as a better option than spending money on rent instead every month."
Checkley says that anybody taking out a longer- term loan should review it every year. "This will make sure you are on track to repay your debt by your expected retirement age, at which point your income might reduce significantly, making any unpaid debt a real burden."
Many older borrowers simply can't stretch their term too far, as lenders can be reluctant to offer mortgages that run beyond age 75.
NatWest and Barclays will lend to 70, while Halifax, Nationwide, Santander and Virgin Money may stretch to 75 but only if you can prove you have enough income to service the debt in retirement, such as pensions or other investments.
Building societies that are more willing to lend to older borrowers include Bath, Ipswich, Kent Reliance, National Counties, Norwich & Peterborough, Mansfield and the Saffron.
This is one of the few areas in today's housing market where the young have an advantage over the old. A spokesperson for Nationwide says: "A first-time buyer age 25 can take out a mortgage with us that will be repaid by age 65 but a 50-year-old couldn't take out a deal running to 90."
Simon Tyler, managing director of broker Tyler Mortgage Management, says he has arranged plenty of 30- and 35-year deals for first-time buyers lately. "Previously, these buyers would have gone for an interest-only deal but it is far better to get them repaying capital and in the habit of seeing their debt reduce."
The sensible thing to do is shorten your mortgage term or overpay as your own finances improve, say, after a promotion at work.
Tyler expect more lenders to offer mortgages further into retirement, especially as life expectancy and working ages increase: more than one million people are now working past the state retirement age of 65.
Stretched mortgage terms
Bank of England governor Mark Carney recently warned that mortgage rates could start rising from the turn of the year and if that does happen, Tyler expects to see mortgage terms stretch even further, as borrowers struggle to make their repayments affordable.
Adrian Anderson, director of mortgage broker Anderson Harris, says banks are happy to lend over longer terms because it helps keep mortgages affordable and maintain a steady flow of new business. "Banks don't charge extra interest for longer- term mortgages; there shouldn't be any difference the rate you pay."
A Halifax spokesperson confirms that it offers exactly the same rates, terms and conditions regardless of the length of the mortgage term. "Our underwriting, application process and criteria are also the same."
As borrowers still have to meet strict affordability criteria, longer-term lending should still be responsible, affordable and appropriate, Halifax says.
Mark Harris, chief executive of mortgage broker SPF Private Clients, warns that borrowers who can only get on the property ladder by stretching out their mortgage term are particularly vulnerable to forthcoming interest rate hikes and that they should consider taking out a fixed-rate mortgage. "The money markets expect the first Bank of England base rate rise to come in the first quarter of 2016 but if you lock into a fixed rate today you will be protected."
Harris says borrowers with longer terms should also seize on every opportunity to overpay their mortgage. "And if you are on course to clear your mortgage before you retire, resist the temptation to take out a further advance, say, to pay for an extension or conservatory."
Just as stretching your mortgage racks up the total interest charges, overpaying brings them crashing back down. Say you had a £150,000 mortgage over a 40-year term. If you paid in a lump sum of £10,000, you would save £26,840 in interest alone, and pay off the debt five years and three months earlier.
Most mortgages now allow you to overpay your mortgage by up to 10% a year but check the small print first. Remember, you usually can't borrow back money you have overpaid, so keep an emergency fund in reserve.
David Ingram, founder of mortgage adviser service Mylocalmortgage.co.uk, says borrowers should think twice before pushing their repayments beyond age 65. "The danger is that growing numbers of borrowers will be saddled with paying off their mortgage even after they have stopped working."
Before doing this, Ingram says you have to think long and hard about your financial situation and what you expect it to be like in the future.
Some may rely on an inheritance to pay down the debt but is this realistic or just a vague hope?
Ingram says: "You have to think very carefully before diving headfirst into a lifelong mortgage commitment."
As people live more mobile lives, changing jobs and partners more regularly, it is ironic that growing numbers are being chained down by long-term mortgage obligations.
Your mortgage shouldn't be for life but increasingly that's the way it's turning out.
A “traditional” mortgage, where the monthly repayments entail of repaying the capital amount borrowed as well as the accrued interest, so that during the loan period the capital debt is gradually paid off so by the end of the term the mortgage has been fully repaid. One advantage of a repayment mortgage is that it removes the risk of having a parallel investment (such as an endowment policy or pension), the performance of which is dependent on the stockmarket, such as with an interest-only mortgage.
A term to describe financial products or ‘plans’ that help older homeowners turn some of the value (equity) of their homes into cash – a lump sum, regular extra income, or sometimes both – and still live in the home. There are two main types of equity release: lifetime mortgages and home reversion plans (see separate entries for both). Whichever type you choose, you borrow money against the value of your property, on which interest is charged, and the loan is repaid when the house is sold after your death.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.