We’re exploring an option in the world of home financing that might not be on everyone’s radar: the 40-year mortgage. Let’s face it, it can feel pretty tough to get on the property ladder for first-time buyers today. Both house prices and interest rates have increased significantly, which has been especially noticeable over the last three years. However, did you know 40-year mortgages are available and have seen a dramatic increase over the past two years with 18% of all first-time buyers opting for a mortgage term of more than 35 years?
So, is a 40-year mortgage the best choice for you? Let’s discuss!
Before we delve in, it’s important to note that a home purchase is no small decision. It is a significant financial commitment that requires careful consideration. But don’t worry, you’re not alone! We’re here to help guide you through the intricacies of the home loan universe.
The 40-Year Mortgage: A Brief Overview
First, let’s address the elephant in the room: what exactly is a 40-year mortgage? As the name suggests, it’s a mortgage loan with a term of 40 years. That’s a decade longer than the conventional 30-year term we’re most accustomed to and double the length of a 20-year term many of our parents and grandparents were lucky enough to afford.
So, how is this affecting first-time buyers?
According to the Office of National Statistics (ONS), earnings have doubled since 1997, whereas house prices have increased four and a half times! So, although first-time buyers are older than they were a couple of decades ago, at the average age of 34, they won’t necessarily have reached their peak income.
Now, an average UK property currently costs £288,000, so a full-time employee on the average salary of £36,000, would need to borrow eight times their annual income in order to afford a property purchase. As most lenders cap their loan-to-income ratio at 4-5%, this leaves a huge shortfall for today’s first-time buyer, if they are taking out the loan on their own.
First-time buyers, therefore, now require a pretty hefty deposit to meet the lander’s affordability criteria. If you have rent costs in addition to the cost of living crisis squeezing your everyday finances, then a large deposit is even more difficult to achieve then ever – this is when a longer mortgage term may become a tangible option.
But what does this mean for you, the future home buyer? Essentially, the longer term means lower monthly payments, which ultimately makes purchasing property possible. But hold your horses! While this may seem incredibly attractive, it’s not without its caveats, as we’ll discuss below.
The Sunny Side: Lower Monthly Payments
Now, let’s bask in the sunlight a bit and focus on the positives of a 40-year mortgage. The most glaring advantage is, as mentioned, the lower monthly payments. With a 40-year mortgage, you’re spreading the cost of your home over 40 years instead of 30 or 20. This can potentially make homeownership more attainable, especially for first-time buyers who are grappling with higher house prices, allowing you to get on to the property ladder sooner.
A 40-year mortgage may also allow you to borrow more, still keeping your monthly payments affordable.
This option could also be beneficial if you’re planning to stay in your home for a long time. A longer loan term provides stability and predictability because you lock in a fixed monthly payment for the duration of your loan.
A Sprinkle of Rain: Higher Overall Costs
Now, before you go rushing to your nearest lender asking for a 40-year mortgage, it’s important to know that there are some potential downsides, the primary one being a higher overall cost. For example, a £150,000 capital repayment mortgage at 4% interest would result in £87,528 in interest payments over a 25-year term. At 35 years this becomes £129,000 and at 40 years £150,917 in interest – more than you actually borrowed! This is because the longer your loan term, the more interest you’ll end up paying over the life of the loan. It’s essential to consider whether this trade-off is worth it for you.
You also need to consider if you’re purchasing your first property at 36 years old, and your mortgage term is 40 years, essentially you could be paying off the loan until you are 76 – well into retirement age – unless you make over-payments or eventually reduce the term length when personal finances allow, such as an increase in salary or inheritance pay out.
This may help you to get a more competitive rate later on, especially with a lump sum repayment, as this will immediately increase the equity you hold in the home. When it comes to remortgaging, the more equity you have, the better that rates become available to you are.
Personalisation Is Key
Remember, the beautiful thing about mortgages (and all personal finance, really) is that they can be customised to suit your unique situation. No two financial journeys are the same, and it’s crucial to choose a path that fits your financial goals and capabilities.
For some, the lower monthly payments associated with a 40-year mortgage may offer the flexibility needed to afford a dream home or free up income for other life goals. For others, the idea of paying more interest over the long term might not sit as comfortably.
Talk To A Pro
Finally, remember that you don’t need to make this decision alone. Mortgage professionals are ready and waiting to assist you. They can provide a more detailed breakdown of what a 40-year mortgage would look like for you and help guide you to a decision that’s in your best interest.
Wrap Up: Should I Consider a 40-Year Mortgage?
As with many decisions in life, the answer to this question isn’t a simple yes or no. It depends on your individual circumstances. Are you a first-time home buyer struggling with high house prices? Are you planning to live in your home for a long period? Do you value lower monthly payments over total interest paid?
If your answer to these questions is a resounding ‘yes’, then a 40-year mortgage might be a viable option for you. However, if the idea of paying more interest over time makes you uneasy, you may need to consider putting towards that deposit a little longer in order to take out a shorter 30- or 35-year mortgage term.