The Bank of England had waded into the rather heated debate regarding the long-term mortgage products many lenders are now offering. There’s been a distinct rise in the number of banks and building societies offering 30-year and 35-year mortgage repayment. Though supposedly to help bring down the monthly costs of repayment, the BOA warned that longer mortgage terms do little other than “store up problems for the future”.
One of the biggest issues highlighted in the report was the way in which longer mortgage repayment periods could have a huge impact on the pension savings of borrowers. By extending mortgage repayments into old age, it becomes necessary to meet them with retirement funds, which may already be stretched to their limits.
But what was interesting was how the report didn’t highlight the way in which longer mortgage repayment periods also mean massively higher overall interest payments for the borrower.
In the UK, mortgages have been offered with a standard repayment period of 25 years for several decades. However, as house prices continue to rise, borrowers have been seeking realistic ways of bringing down their monthly mortgage bills in order to get on the housing ladder. In response, banks are now routinely offering repayment periods of up to 35 years. But in doing so, the overall costs payable by the borrower skyrocketed.
Take, for example, a smaller loan of £100,000, charged at a rate of 4.5% with an initial charge of £500. Over the course of 25 years, monthly repayments would be around £556, and the total amount payable would be £167,250. By contrast, up to a 35-year mortgage, while monthly payments are reduced modestly to £473, the total amount to repay increases to £199,250, an increase of £32,000 and double the amount borrowed.
In the case of a larger loan, say £400,000, with the same interest rate and fee, the change is even more dramatic. If paid back over 25 years, you’d be looking at £2,223 per month and a total repayment amount of £667,500. Over the course of 35 years, monthly repayments come down to £1,893, but the total repayment amount increases to £795,550, a hike of nearly £130,000.
But it’s not just in the UK that this is happening, either. In most countries where wage growth is being outpaced by house price inflation, longer mortgages are being offered to bring monthly repayment amounts down. It’s particularly prevalent in Sweden and Japan, where mortgages are available with repayment terms of more than 100 years.
As far as the Bank of England is concerned, those considering signing a long-term mortgage today need to think very carefully about tomorrow. Lower monthly repayments are all well and good, but not if they make it difficult to get by in later life. Plus, the longer the mortgage term, the longer the period during which your home is at risk of repossession if you fall behind on your payments.