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The long and the short of it

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  • 17/06/2002
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The depth of concern about the problems facing would-be homeowners, who have been kept off the prope...

The depth of concern about the problems facing would-be homeowners, who have been kept off the property ladder by spiralling prices, was illustrated recently when a story forecasting a move towards longer mortgage terms hit the front page of several national newspapers.

A leading broker, Charcol, suggested the UK could follow in the footsteps of Japan , where despite an interest rate of 0%, the cost of property was forcing buyers to opt for loans with terms as long as 100 years.

Although nobody is suggesting UK lenders will go to such extreme lengths as Japan, Charcol has stated loans with a 30,40 or even 50-year term could become more commonplace, as the reduced monthly payment could bring the cost of buying a home within reach for many borrowers.

In a climate where concern has already been voiced about lenders increasing LTVs and stretching income multiples, a move to longer-term borrowing does not seem sensible for borrowers that could already be pushed to the limit in terms of affordability.

Lending over a term as much as 40 or 50 years is not responsible.

There is no doubt many first-time buyers, anxious to own their own homes, will be blinded by the attractive repayments offered on longer-term deals. But when you do the maths, there is no way this can be in the best interests of the borrower.

Take a £100,000 loan with a rate of 5.25%. On a standard 25-year term the monthly repayment would be £600. Stretch that term to 40 years and the repayment becomes a lot more appealing at £498; stretch the term even further to 50 years and the borrower pays a rate of £471.

However, when you work out how much more borrowers pay in interest over the full term of the loan ‘ these deals become much less tempting. On that same 25-year loan the borrower pays a total £79,784 in interest ‘ a bitter pill to swallow as it is, but extend the loan to 40 years and the interest paid rises by £59,684 to a whopping £139,458.

The average first-time buyer is now 34 and in a society where individuals are making minimal provisions for their own retirement the last thing the mortgage industry should be doing is saddling borrowers with debts that will run into their retirement.


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