Over the next 50 years it’s expected we’ll see an additional 8.2 million people aged over 65 in the UK – a population roughly the size of London. The ONS also predicts the proportion of economically active 65 to 69-year-olds will rise from 10 per cent in 1992 to 50 per cent in 2067.
That brings all sorts of challenges around how we work and live. It is also going to change how we pay for where we live.
The 40-year mortgage
The extended 40-year mortgage product is primarily designed to help first-time buyers (FTBs) who are struggling with affordability criteria. On average, a full-time worker needed 7.8 times their annual earnings to buy a home in England and Wales in 2018.
In some areas of London, this rose to 44.5 times annual earnings.
Much of the problem for FTBs is, of course, raising the deposit. But while the increasing number of products with loan to value ratios over 90 per cent (not to mention the bank of mum and dad) is helping these buyers, lender affordability checks can still act as a barrier.
These have been tightened over the last decade and, when looking at the applicant’s income and outgoings, lenders may deem that repayments on a 25-year term are unaffordable. Even if the applicant is currently paying more than the required monthly repayment in rent.
The reason is that lenders must consider whether the repayments are affordable for the borrower not only at the time, but also in the future if interest rates were to increase dramatically – up to six or seven per cent, from 0.75 per cent today.
That’s where the longer-term mortgage comes in.
On a £250,000 repayment mortgage, for example, monthly repayments at a rate of 3.5 per cent over 25 years are £1,252.
Taking the same mortgage over a 40-year term, though, would reduce the monthly repayments to £969, a difference of £293 a month – and possibly the difference between being accepted for a mortgage or not.
It’s not surprising, then, that the number of 40-year term products has increased by 13 per cent over the last five years, according to Moneyfacts.
Half of all residential mortgage products now have a standard maximum term of up to 40 years, while the number of 25-year and 30-year terms has decreased.
According to Which?, there are 37 lenders offering 40-year term mortgages.
For those using Help to Buy, the government also recently announced closing a loophole which prevented borrowers from switching onto longer mortgage terms above 25 years.
Could borrowers live to regret it?
There are two potential concerns with 40-year terms which really emphasise the importance of speaking with an adviser.
The first is that the interest accrued over a 40-year term is higher than over a shorter term, so borrowers end up paying more in total.
Using Moneyfacts’ example, a £200,000 repayment mortgage at a rate of 2.5 per cent over 25 years would lead to a total interest payable of £69,169. The same mortgage taken over a 40-year term would increase the total interest paid to £116,588.
This only applies, however, if borrowers stick with the same product and take the full term to repay the mortgage. They can avoid this by either making overpayments or by remortgaging.
The former option is particularly useful if the borrower has been paying higher rent previously. They can benefit from the higher borrowing limit that a 40-year term allows, while still making the necessary overpayments to clear the debt more quickly.
They just need to work with their adviser to make sure they choose a product that allows overpayments.
They could also take an initial 40-year term and then, at the end of the fixed-rate period, remortgage. If their income has risen or other circumstances have changed, they could switch to a shorter-term – again, reducing the overall amount paid.
A more flexible future
The average age of an FTB is now 33 in England, but with more people likely to be working later in life, lenders are becoming increasingly comfortable with longer mortgage terms.
Traditionally, lenders imposed a maximum age limit on borrowing of 65.
But now with people working for longer, there are more than 1,000 mortgage products for borrowers over 80, again according to Moneyfacts.
Only 18 mortgage deals with a maximum age restriction of between 65 to 69 still exist, compared to more than 900 in 2014.
With the 100-year life set to be a realistic expectancy for many, it feels more and more possible that a 40-year mortgage could be the future normal.
Picking the right mortgage is about more than just finding the lowest rate, other features such as how much borrowers can overpay each month, should also be considered.