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1 Mar 2020

First-time buyers: 30 and 35-year mortgage terms could save you up to £170 a month

Two thirds of first-time buyers borrow for more than 25 years, but there are pitfalls to consider

Taking out a mortgage for longer can cut your monthly repayments by up to £170, but do the dangers of borrowing for an extra five or 10 years outweigh the benefits?

Research by the Financial Conduct Authority's Insight team found that cash-strapped first-time buyers are increasingly taking out mortgages with terms of more than 25 years.

Here, Which? explains why people are borrowing for longer and offers advice on how you can pay off your mortgage more quickly.

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Homebuyers taking out longer mortgage terms

The FCA says two thirds of first-time buyer mortgages now have terms of more than 25 years, compared with just one third back in 2006.

This has resulted in the median first-time buyer mortgage term rising from 25 to 30 years in that time.

Overall, 41% of mortgages now last longer than 25 years, compared to just 14% before the financial crash.

Why are buyers borrowing for longer?

The FCA says buyers are borrowing for longer due to issues with affordability and the decline of interest-only mortgages.

Back in 2006, interest-only deals made up 35% of the mortgage market, but now that figure is just 4%.

One of the big knock-on effects of longer mortgage terms is that more people are borrowing beyond the projected retirement age.

Five years ago, 26% of all mortgages were due to mature when the borrower was 66 or older, but by 2018 this had risen to 30%.

While that might not sound like a big rise, it represents an increase of nearly 411,000 mortgages.

How much could you save by choosing a longer term?

With house prices still out of reach for many first-time buyers, lenders are increasingly offering maximum mortgage terms of 35 or even 40 years.

And a longer term certainly results in lower monthly costs.

We've crunched the numbers and found that you can save as much as £100 a month by choosing a 30-year term rather than a 25-year term.

The tables below show that at 90% loan-to-value (LTV), adding an extra five years can shave off £98 a month, or £101 at 95% LTV.

Stretching the term to 35 years saves a further £70 a month taking the total saving to around £170.

90% loan-to-value

TermMonthly repayment (first two years)Amount repaid in first two years
25 years£798£19,164
30 years£700£16,805
35 years£630£15,131

Source: Moneyfacts, February 2020. Based on a loan of £180,000 (£200,000 property) using the current cheapest two-year fixed-rate deal at 90% LTV (1.69%).

95% loan-to-value

TermMonthly repayment (first two years)Amount repaid in first two years
25 years£913£21,927
30 years£812£19,494
35 years£741£17,785

Source: Moneyfacts, February 2020. Based on a loan of £190,000 (£200,000 property) using the cheapest two-year fixed-rate deal at 95% LTV (2.59%).

The cost of choosing a longer term

As you can see, it can be significantly more affordable in the short term to take out a longer mortgage.

The big problem is that it'll take you longer to pay off the loan and you'll pay more in interest.

The tables above show that for every five years you add on to your term, you pay off around £2,000 less during the initial two-year period.

Longer mortgages: terms and overpayments

For some borrowers, taking out a longer-term mortgage might be the only way to be able to afford a property, and terms of 30 years or more aren't necessarily a bad idea.

After all, people are living and working, on average, for longer than previous generations. As it stands, the state pension age for anyone born after 6 April 1978 will be 68, but chances are this will figure will continue to rise.

One good rule of thumb with mortgages is to make hay when the sun shines. Right now, mortgage rates are very low, and most deals allow overpayments of up to 10% of the balance each year.

If you can put some extra money towards your loan (either monthly or on an ad-hoc basis) it's possible to pay off your mortgage much earlier and make big savings along the way.

For example, if you borrow £200,000 over 30 years (at a rate of 3%), by paying an extra £50 a month you could cut more than two and a half years off your term and save £10,000 in interest.

Find out more:mortgage overpayment calculator

Alternatives to longer mortgage terms

Unless house prices get significantly cheaper, mortgage lenders will need to continue to offer innovative ways to improve affordability for first-time buyers.

As well as longer terms, some lenders have sought to increase the maximum annual income multiple you can use to get a mortgage, though the Bank of England is keeping a close eye on this.

Generally speaking, most lenders will offer up to four and a half times your salary, but there are exceptions.

For example, Barclays increased its maximum limit to five times annual income for first-time buyers earning more than £30,000 last year.

Best rates on low-deposit mortgages

If you're looking to take out a 90% or 95% mortgage this year, the good news is that rates are very attractive, especially if you can save a 10% deposit.

The interactive chart below shows the cheapest introductory rates currently on offer on two and five-year fixes for first-time buyers with small deposits.

Best and worst mortgage lenders

Each year, we ask thousands of members of the public about their experiences with their mortgage lender.

We rate lenders on a whole host of attributes, from customer service skills to value for money, and in 2019 we awarded three lenders the coveted Which? Recommended Provider status.

You can find out who tops the table in our guide on the best and worst mortgage lenders.