Key considerations when contemplating a 30 or 40-year mortgage

Increasing number of Londoners sign up for 'marathon mortgages'

So, you are looking to buy a new property – perhaps your first – or to remortgage on an existing one and you are trying to decide on which term length to choose but your finances suggest that a longer term will be better. You’re not alone. New research from Experian suggests that an increasing number of Londoners are signing up for what they term ‘marathon mortgages’ that last at least 35 years as they look to gain a foot on the property ladder.

Longer mortgage terms

Experian’s figures show that in 2020, 11% of under 30s in London took out a mortgage with a term of 35 years or more. Today that figure has more than doubled to 27%. The figure compares to a UK average of 25%.

Similar data from UK Finance published earlier this year, revealed that 19% of all loans taken out by first-time buyers in March were for 35 years or more, with more than half taking on terms of more than 30 years. Amongst more general home movers, the number taking out mortgages for terms of 35 years or more was also up, doubling from 4% in December 2021 to 8%.  

The average mortgage term used to be 25 years, but that average has been creeping up for some time. Today with an increased cost-of-living as well as high interest rates and mortgage rates, longer mortgage terms may be the only solution for you. Terms of up to 40 years are now available from some lenders but it’s important to carefully consider what’s best for your particular circumstances.

Think before you buy

It may seem like the easy option is to simply choose the longer term, especially as 40 years seems so far off. You can worry about it in the future, can’t you? But the decision isn’t that simple. The difference between a 30 and 40-year mortgage can be significant, both in terms of the overall interest costs as well as its impact on your current and long-term financial goals. After all, if you plan to retire early and travel the world you won’t want to be burdened with mortgage payments.

Monthly affordability versus overall cost

Adding extra years to your mortgage brings down your monthly costs and so can be attractive in the short term, giving you more money in your pocket on a daily basis. But remember that the monthly payment, if you are on a repayment mortgage, is comprised of both your initial mortgage debt and the interest that your mortgage lender is charging. Once that interest rate is spread over additional years your overall interest costs are likely to increase by tens or even hundreds of thousands of pounds.

In its research, Experian highlighted that a £400,000 loan with a 4.5% interest rate on a 25-year term would incur £266,739 of interest. Over 35 years the interest payable jumps to £394,674, and over 40 years rises yet further to £462,688. Once you contemplate the impact of those figures, especially considering that the current interest rate for a standard 30-year fixed mortgage was 8.04% at the end of October, the attractiveness of a lower monthly cost might not be so great.

Being clear on your long-term financial goals and allow for future changes

Deciding between terms means being clear about your financial goals – both in the present and the future. Experian research shows that 37.5% of Londoners will still have mortgages to pay beyond their normal retirement age of 67, so you will need to consider whether that is something you are happy to do or whether you need to look again at how much you are able to spend and the amount of mortgage debt you can take on.

It may be that you are willing to budget tightly and live frugally in order to pay off your mortgage earlier, in which case opting for a shorter term could be an option. Or you may want to live and spend more freely in the present and therefore the increased interest of a longer-term mortgage is the price you are willing to pay.

It is important to future-proof your mortgage by considering any potential changes in lifestyle during the mortgage term and how this could affect your affordability. It might be hard to plan for changes beyond your control, such as a reduction in salary or increase in energy costs, but incorporating a buffer into your affordability calculations will help account for this. Planned changes in financial circumstance can and should be considered when applying for a mortgage, for instance starting a family, including how you predict this will impact your ability to earn or your level of excess income per month and over what time period.

Consider overpayments on longer-term mortgages for flexibility

One option on a longer-term mortgage is to secure a deal that allows for overpayments – and then to overpay when you can afford to do so or get additional cash that you weren’t expecting. This option will allow you to shorten the total length of your mortgage and therefore the overall interest payable. It allows the flexibility of paying extra when you can and the standard amount when you can’t.

At ludlowthompson we are proud of the trusted relationships we have built with our clients during 30 years in business. We are ready to help you find your dream property so do get in touch with an expert at your local branch today to find out more about how we can help. We offer a range of services including mortgage advice and promise to deliver maximum performance, communication and trust for the London market.