Fluctuating high interest rates are pushing more people to opt for long-term mortgages to reduce monthly costs, a new survey has revealed.
Half of the people surveyed by David Wilson Homes said they would take on a marathon mortgage in order to afford a home.
These mortgages last between 30 and 40 years and allow people to repay the home loan in smaller increments spread over a longer period of time — but there is a sting in the tail.
“You should be aware that by taking out a mortgage deal over a longer term means you will pay more interest over time,” said Terry Higgins, mortgage expert at The New Homes Group.
The average age of a first-time buyer in London is now 35, so a 40-year mortgage would see them paying off their debt — with all that interest — until the age of 75.
People aged 35 to 38 alreported that fluctuating interest rates was the biggest influencing factor behind considering a long-term mortgage.The mortgage market has been volatile in the first half of 2024, with products offering better rates getting pulled with days of being announced. Meanwhile the Bank of England has kept the base rate at 5.25 per cent in a bid to curb inflation.
In May, freedom of information (FOI) data supplied by the Bank of England revealed that in the final quarter of 2023, 42 per cent of new mortgages had terms that would go beyond the state pension age of 66.
"Long-term mortgages aren’t exactly new, in fact, they have been around for a while and are typically popular with first-time buyers,” explained Higgins.
“However, due to higher interest rates and increasing property prices they are now becoming more attractive among a wider audience.”
Higgins has five essential points for would-be borrowers to consider before the sign up for a marathon mortgage:
1. Do a financial audit
By taking longer to repay your debt, your monthly payments will be lower and you may even be able to borrow more. But a 30-year-plus loan is a long financial commitment.
"Before taking out a long-term loan, it's crucial to evaluate your current financial standing. Take stock of your income sources, monthly expenses, outstanding debts, and existing savings,” advises Higgins.
“Understanding your financial health will give you a clear picture of your ability to afford and manage a long-term loan responsibly.”
2. Think long term
Those lower monthly payments might seem attractive, but you will be paying more by the end.
“Particularly in the early years, you will be paying less towards your loan as a larger portion of the monthly payment will instead go towards the accrued interest, as opposed to the original loan debt,” says Higgins.
“Particularly in the early years, you will be paying less towards your loan as a larger portion of the monthly payment will instead go towards the accrued interest, as opposed to the original loan debt.”
3. Read those T&Cs
You need to read all the small print when it comes to a marathon mortgage.
“Don't rush into anything without fully grasping the terms and conditions of the loan. Take your time to review all the details, including the interest rate, repayment schedule, fees, and any potential penalties for early repayment or default,” he says.
“Pay close attention to the small print and seek clarification on any confusing clauses. Understanding the specifics of the loan agreement will help you make informed decisions and avoid unpleasant surprises down the road."
4. Plan for retirement
“While it may seem like a long way off for some, your predicted retirement age is something that should be considered when contemplating a marathon mortgage,” says Higgins. Think about when you might want to retire and have a plan for how you’d keep paying the mortgage once you do - because your lender will want proof.
You’ll also want to think about how you’ll make those monthly payments in the years before you retire.
“Ideally, you should make sure you have a reliable source of income to cover the loan payments over the long term. Consider any potential changes in your employment status, such as job stability and salary changes,” says Higgins.
“Assess whether your current income level is sufficient to comfortably afford the loan payments while still meeting your other financial obligations. It's essential to have a plan in place to handle unexpected financial setbacks, such as back-up savings.”
5. Explore the alternatives
A marathon mortgage might be enticing right now, but it’s not for everyone.
“Explore other loan options that might better suit your needs. Compare the terms, interest rates, and repayment options offered by different lenders to find the most favourable solution for your circumstances,” Higgins suggests.
“The best advice I can give is to speak to an independent mortgage adviser as early as possible in the house buying process. They can then discuss your mortgage needs in the short, medium, and long term and conclude if a marathon mortgage is the right choice for you.”
