According to IMLA’s latest research, over three-quarters (77%) of brokers and 74% of lenders think that a rise in 35-year term mortgages is an “inevitable consequence” of low wage growth and spiking house prices.
The research found that 69% of mortgage brokers, or just about seven in ten respondents, reported a spike in demand for 35-year mortgages. While 13% reported a “substantial” increase in the first six months of 2017.
David Hollingworth, associate director of London and Country Mortgages, said that the trend for longer terms is “definitely happening, particularly for first-time-buyers who are looking to keep costs down in the early stages — it gives a bit of extra breathing space month to month by pushing out beyond traditional 25 year term.”
Peter Williams, executive director of IMLA, said: “In recent years, rising house prices, inflation and low wage growth have put significant pressure on prospective buyers’ incomes, meaning that many would-be borrowers now have to spread their payments out for longer periods in order to get a loan (and to qualify for a mortgage under the affordability tests now in place).”
However, despite acknowledging the potential benefits of longer terms for consumers, 16% of those surveyed in the study were also concerned the long terms will hinder people’s capacity to save for retirement.
Hollingworth also shared this worry: “The downside, of course, is that if they keep that term it’ll cost literally thousands more in interest over the life of the loan. The concern is that people are borrowing until later in life, beyond retirement.”
“However, while it might take 35-40 years initially.” He added, “People will revisit that and if their circumstances change, they could reduce the term back down.”
In July this year, Prudential Regulation Authority (PRA) chief executive Sam Woods delivered a speech warning lenders about the dangers of longer mortgage terms. Saying that “increasing the term reduces the level of each monthly instalment and makes the loan more affordable in the short term; however, it also increases the total amount of interest paid over the life of the loan quite significantly, and it increases the possibility that the final instalments may have to be met from post-retirement income.”
According to Williams, around a third of first-time buyers take out a mortgage with a term of over 30 years, and that most of these are for less than 35 years.
“The majority of brokers (62%) and lenders (68%) agree that longer-term mortgages are an essential option for aspiring homeowners and would argue that this is a response to reality and remains responsible lending. However, this in no way lets the government off the hook in needing to act swiftly to address the housing crisis. With many borrowers struggling to make home ownership a reality, it is recognised that the growing recourse to longer-term mortgages could impact upon people’s capacity to save for retirement albeit this is offset to a degree by the purchase of a property asset,” said Williams.
“In order to prevent retirement saving and homeownership becoming mutually exclusive, government and policymakers have a responsibility to tackle the root of the chronic supply/demand crisis facing the UK. Theresa May’s housing summit at No 10 is recognition of that and working in tandem with the industry, we would hope the government can move forward to improve housing supply and the life prospects of Generation Rent.”