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26 February 2021

Mortgage Terms: is 35 years the new 25?

Bylined to Helene Hughes

Much like they say 40 is the new 30, or 50 the new 40, a 35 year mortgage is the new 25 year mortgage, to quote a broker I was recently talking to. 

He was talking about the increasing tendency for home buyers to take out longer mortgage terms. He is of course not the only intermediary to become aware of the trend, as it has long been bubbling up; I’ve certainly noticed a gradual shift towards longer mortgage terms in the eight years I’ve been working at Principality. 

The trend is borne out by stats too. In fact, the FCA said last year that two thirds of first-time buyer mortgages now have terms of more than 25 years, compared with just one third back in 2006.  

There are lots of good reasons for this, which reflect changes over recent decades in the way we live, work and spend.

One of the biggest changes has been to house price affordability. In England and Wales overall, the housing affordability ratio more than doubled between 1997 and 2016. It’s just become so difficult for first time buyers to achieve their dream.

So they’re increasingly turning to longer-term mortgages to be able to get an affordable mortgage. Research by Which? published last year* showed you can save as much as £100 a month by choosing a 30-year term rather than a 25-year term. Given the big expense of a deposit, alongside all of the other fees buyers now face, it’s unsurprising they may choose a longer term. 

Today’s first time buyers also usually tread a very different life path to their parents or grandparents. Everything happens later, from starting a career, to settling down and buying a first home - the average age to do so now is 34. By contrast, my parents were typical of their generation by getting on the housing ladder in their early twenties.  Retirement will come later too, and lending is changing to reflect that. At Principality, we’ll lend up to your 75th birthday*. 

Nothing is set in stone. Today’s first time buyers will over the years shift their financial and mortgage needs as their own situation changes. Later on in life - when today’s first time buyers are earning more money and advancing their careers - they may well choose to opt for a shorter term mortgage, which may be more appropriate at that new stage of life. 

Many of today’s first time buyers also expect to inherit property from their parents at some point. This windfall, which wasn’t often on the cards for the previous generation, is another way that buyers can switch to a shorter term, or pay off their mortgage entirely, later in life. 

Let’s not forget too that most mortgages have the facility to also overpay too, which can reduce both the balance and the term. That’s certainly the case at Principality: borrowers can overpay up to 10% on all our mortgage products, including buy to let.

In a nutshell, today’s home buyers are living longer and working longer, while their financial pressures have changed greatly from the previous generation. Their parents, who were usually in a very different situation, would have typically chosen a shorter mortgage term, but the world has moved on and, for many people, longer terms offer a solution to today’s problems. 


*Subject to lending criteria and affordability

https://www.which.co.uk/news/2020/03/first-time-buyers-30-and-35-year-mortgage-terms-could-save-you-170-a-month-but-what-are-the-pitfalls/

 

Published: 26/02/2021

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