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Brokers must flag overpayment options on 40-year mortgages – analysis

  • 18/04/2019
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Brokers must flag overpayment options on 40-year mortgages – analysis
Intermediaries have suggested it is crucial for advisers to highlight the potential to make overpayments when recommending 40-year mortgage terms, as well as review the term whenever the client remortgages.

This week Santander announced it would be extending its maximum mortgage term to 40 years, following its own research which found that almost half of homebuyers would consider taking out a loan over such a lengthy term in order to get onto the housing ladder.

Miguel Sard, managing director of mortgages at Santander UK (pictured), said: “By offering buyers the option of a longer-term mortgage, our aim is to address some of the affordability restrictions they face and support them in buying a home with more manageable monthly repayments.”

Review terms when rates end

David Sheppard, managing director of Perception Finance, suggested that while lenders had increased average mortgage terms in order to help borrowers move onto or up the ladder, the long-term advice should always be to reduce that term by encouraging the use of any overpayment or offset flexibility available.

The rate end review is also an opportunity to address the term, as Sheppard said: “We had one client who started with a longer term and with each remortgage this was reduced to reflect their higher income. This is the role of a mortgage broker over the lifetime of this financial transaction.”

He added that the industry should not be scared of offering these terms, but that good advice was key, with intermediaries needing to regularly engage with clients to ensure they stay focused on reducing that debt more quickly wherever possible.

Borrowers must understand the ramifications

Jane King, mortgage consultant at Ash Ridge Private Finance, said she was not keen on recommending such lengthy terms, noting she had only done this once in 15 years of advising.

She continued: “I think it is too long and once you take applicants past retirement age, as an adviser you have to be aware of the future affordability even if the lender is happy to lend.”

King added that as borrowers chop and change their term and rate over the course of their lifetime, in certain circumstances these deals have a place.

“I would rather have access to it than not as long as the borrowers are aware of the ramifications,” she continued.

Essential in the south

James McGregor, director of MESA Financial Consultants, suggested that in and around London, life is so expensive that long-term mortgages are “essential” to be able to buy a property and keep life affordable.

He continued: “Over a prolonged period property inflation should put the clients in a comfortable position as long as they continue to repay their mortgage over a 40-year term.”

McGregor added that while he always educates clients about the impact of overpayments, “the sad reality” is most people won’t be able to afford to make them.

“It is not about just finding the best deal for now, it is about helping clients live a comfortable life where they are not forced to run up unsecured debts,” he concluded.

Just a starting point

Rachel Lummis, mortgage adviser at Xpress Mortgages, said that the house price inflation seen over the last decade had priced first-time buyers out of the market, and with interest-only deals no longer an option for most, 40-year terms are now “vital”.

She continued: “When choosing a mortgage term of 40 years it’s not committing you to a 40-year mortgage, it’s just a starting point. When coming to the end of say a two- or five-year fixed rate and the customer is looking to remortgage, the term can be looked at again.”

Lummis added that she hoped to see more lenders start offering such long terms in order to increase the level of choice for borrowers and their brokers, noting that “the 40-year mortgage term is here to stay”.

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