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20 Aug 2021

First-time buyers: could you save on repayments by taking out a 35-year mortgage?

Longer mortgage terms are becoming commonplace, but watch out for the pitfalls

The number of borrowers taking out mortgages lasting 35 years or longer has hit a three-year high, as house prices continue to rise.

For cash-strapped buyers, a longer mortgage term can be the difference between getting accepted or rejected, but you'll need to think about the long-term costs before applying.

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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Number of longer-term mortgages hits three-year peak

Borrowers are taking out increasingly long mortgages as they struggle to keep pace with rising house prices.

A Freedom of Information request by the wealth manager Quilter found that 25,112 mortgages were sold with terms of 35 years or longer in March this year.

This is the first time in three years that sales of longer-term mortgages have gone above 20,000 and marks a 70% increase compared to March 2019.

Why are borrowers taking out longer mortgages?

House prices have been rocketing, with the cut to stamp duty super-charging the property market. Data from the Land Registry shows prices rose by 13% year-on-year in June.

These increases have led to more homebuyers taking on longer mortgage terms in an attempt to improve their affordability.

Historically, most mortgages had terms of around 25 years, but this has changed since the financial crash of 2009.

Data from the Financial Conduct Authority (FCA) shows that in March 2020, 41% of mortgages had terms of longer than 25 years, compared to just 14% before the crash.

Are first-time buyers more likely to take out longer terms?

It's safe to assume struggling first-time buyers feature heavily in Quilter's figures on longer mortgage terms.

First-time buyers face the double whammy of needing to compete with rising prices and taking out mortgages with the highest interest rates (due to their small deposits).

Even before the Covid-19 pandemic, lenders had identified that offering longer terms was one of the best ways of improving the likelihood of first-time buyers passing their affordability checks.

FCA data published last year showed the median first-time buyer mortgage term had risen from 25 years in 2006 to 30 years in 2020.

How much could you save with a 35-year mortgage?

Taking out a mortgage for 35 years will significantly lower your monthly repayments, albeit with the caveat that you'll be making repayments for much longer.

We've crunched the numbers based on the cheapest deals currently available at 90% and 95% loan-to-value (LTV) to see what effect a longer mortgage term can have on monthly costs.

90% loan-to-value

At 90% LTV, borrowers can save £166 a month in repayments by taking a 35-year term rather than a 25-year term.

The knock-on effect of lower repayments is that you'll repay £3,985 less off your mortgage balance in the two years.

TermMonthly repayment (first two years)Amount repaid in first two years
25 years£774£19,630
30 years£667£17,294
35 years£608£15,645

Note:Moneyfacts, August 2021. Based on a loan of £180,000 (£200,000 property) using the current cheapest two-year fixed-rate deal at 90% LTV (2.13% with a £995 fee).

95% loan-to-value

When it comes to a 95% mortgage, a 35-year term could save you £171 a month compared to a 25-year term.

In this instance, however, you'll pay £4,083 less off your mortgage balance in the two years.

TermMonthly repayment (first two years)Amount repaid in first two years
25 years£896£22,554
30 years£795£20,151
35 years£725£18,471

Note:Moneyfacts, August 2021. Based on a loan of £180,000 (£200,000 property) using the current cheapest two-year fixed-rate deal at 95% LTV (2.95% with a £999 fee).

Do all lenders offer longer mortgage terms?

Most lenders offer maximum mortgage terms of 35 or even 40 years, but they may not be on offer to everyone.

When we analysed 40-year mortgages in March 2019, we found lenders were reluctant to say how many loans they'd granted of 35 years or more, but some did confirm that 40-year terms - while theoretically widely available - were uncommon.

Whether you'll be accepted may largely depend on your age when you apply, as lenders impose limits on the maximum age you can be when the mortgage is due to be repaid.

Limits of 75 years old and 80 years old are common, so if you're over the age of 40, you may find your options limited when it comes to the longest mortgage terms.

The downside of a longer mortgage term

Ultimately, the longer the mortgage term you take, the longer you'll be repaying the loan, and the more interest you'll pay along the way.

A longer term can open up the prospect of borrowing beyond your retirement age, which can have an impact on your standard of living in retirement.

This means that while taking out a longer term may be the only way you can afford a property right now, doing so comes with significant caveats.

Longer mortgage terms and overpayments

If you plan carefully enough, there are ways you can mitigate the impact of borrowing for such a long time.

Right now, mortgage rates are low, and most deals allow overpayments of up to 10% of the balance each year.

This means that if you can pay a bit more towards your mortgage (either each month or on an ad-hoc basis), you could pay it off much earlier and make big savings along the way.

Earlier this month, we crunched the numbers and found that by making an overpayment of £100 a month on a £200,000 mortgage, you could shave more than three years off your term and save £10,000 in interest.

Choosing a mortgage term

Borrowing for longer may cut your monthly repayments, but as we've explained, it's not a no-brainer. With this in mind, think carefully before settling on a mortgage term.

You'll need to find the balance of a term that's affordable right now (both in terms of being accepted for the loan and your month-to-month finances) but that doesn't saddle you with debt for longer than is necessary.

As a first port of call, consider speaking to a whole-of-market mortgage broker. A good broker will be able to assess your finances and model how different terms could affect your repayments and the amount of interest you'll pay in the long run.