rate increase

Are 40-year term mortgages a good choice for borrowers?   

Data collected by Moneyfacts.co.uk has shown a marked increase in the number of 40-year term mortgages available, but are they a good choice for borrowers?

According to the Moneyfacts research, the number of products with a 40-year term option increased by over 40% in June 2019, while both 25 and 30-year term mortgages declined over the same period. Significantly, 40-year term mortgages now represent 54.98% of the mortgage market, while 30-year term mortgages represent only 3.31% and 25-year term represents just 3.23%.

There are now 2,744, 40-year term mortgage products available. Borrowers seeking a 25-year mortgage have only 161 mortgage products available to them and the number of 30- year term mortgage products has dropped from 392 to 165.

Smaller repayments, but greater accumulated interest

The increase in 40-year term mortgages could be attributed to the need of many borrowers for smaller, more affordable, monthly repayments. However, while longer-term mortgages reduce the monthly repayments over the course of the loan, the accumulated increase in interest is considerably more. Borrowers should be aware that short term savings will cost them more in the long term.

Moneyfacts finance expert Darren Cook says: “For example, a £200,000 repayment mortgage at a rate of 2.50 per cent over 25 years equates to a monthly repayment of £897.23 and total interest payable would be £69,169 over the term.

“However, the same mortgage taken over a 40-year term would reduce the monthly repayments to £659.56 but increase the total interest to be paid to £116,588, resulting in an additional £47,419 in interest.”

While a 40-year term will make a mortgage more affordable right now, borrowers should seriously consider the downsides. Not only will they be paying more in interest over the term of the mortgage, but they will also build equity in their property at a much slower rate, plus they should also expect to pay a higher interest rate than they would on a shorter-term mortgage.

However, for those that are buying their forever home and have no plans to move again, or those that want to get on the housing ladder now and may soon be in a position to overpay their mortgage,  a 40-year mortgage could be a good idea.  Borrowers could take advantage of low monthly repayments now and remortgage as soon as they are able, to a better interest rate and a shorter mortgage term.

Listen to more on mortgages in the latest BuyAssociation podcast

This month’s podcast will be covering everything you might need to know about property management and mortgages. We will be joined by Matt Eastham from Easthams & Co – Property Management and Marcus Docker from Visionary Finance. They give us their insider’s view on everything you need to know in the property management and mortgages markets, hosted by our very own Katie Walker.

Covering our some of clients’ top questions and the latest changes in the UK property market, market trends, Section 21, letting fee bans, Generation Rent and buying a property through a limited company.

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