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Overpayments crucial as mortgage terms lengthen – analysis

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  • 17/10/2019
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Overpayments crucial as mortgage terms lengthen – analysis
Advisers must sell the benefits of making overpayments as longer mortgage terms become more common, brokers believe.

 

Data released by Moneyfacts this week revealed the number of mortgages which can be taken out over 40-year terms has risen from 2,412 last year to 2,782, a 15 per cent increase.

As a result, more than 57 per cent of residential mortgages are now available for terms of up to four decades.

While brokers have welcomed the opportunity for some borrowers to take out home loans over such lengthy terms, they have sounded a note of caution over mortgage terms of more than 30 years becoming the “new normal”.

 

Look for somewhere cheaper

Jane King, mortgage adviser at Ash Ridge Private Finance, said that she had never recommended a 40-year term, as she was “not comfortable” with that length, while nearly all of the borrowers she deals with are looking for as short a term as possible.

She added: “If affordability is an issue at 35 years then I would advise looking for a cheaper property or increasing their deposit. If pushed I may consider it in exceptional circumstances but this has not happened yet.

King also questioned how many 40-year term mortgages are sold directly to borrowers by lenders, or via the internet, compared to how many are advised.

“I would guess that the vast majority came from the first two,” she said.

 

The new norm

Martin Stewart, director at London Money, said that lengthy mortgage terms are “fast becoming the new normal” for borrowers, simply so that they can improve the affordability of a home loan.

He said more often than not he was seeing borrowers opting for terms over 30 years, and said that on the face of it there’s nothing wrong with that, as people are working longer and fitter now.

He continued: “We encourage borrowers to look at a mortgage not as a product, but as a financial planning tool. A rolling credit facility that allows them to be flexible with their debt depending on where they are in their life cycle. 

He cited the fact that many mortgages are now flexible enough to allow regular overpayments in order to speed up paying off the loan, and noted that when the time comes to remortgage they discuss whether the client wants “to play catch up and get the term down to something shorter”.

“Circumstances at the time will dictate the client’s attitude toward doing that.”

 

Brokers must sell the option of overpayments

Paul Flavin, managing director of Zing Mortgages (pictured), called on brokers to look at lengthy terms as an opportunity to act as advisers rather than order takers.

He explained: “Often we use the longer term, not because we feel the client will have that mortgage for the next 40 years, but because it gets the monthly payments to where the client needs them to be. As brokers, we should be reviewing the client’s circumstances on a regular basis, and as their financial position improves, encourage overpayments in the interim followed by a shortening of the mortgage term when it’s time to rebroke the mortgage.”

He said that while he was happy for borrowers to have the option to go for as long a term as possible, it was vital for brokers to sell the idea of reducing the term of making overpayments.

Flavin continued: “After all, the flexibility of a mortgage – extending and reducing the term, as well as the borrowing ‒ is one of the great things about our industry. Tailoring the product to meet the client’s short term needs is all important.”

 

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