There has been discussion among the industry around the prevalence of longer mortgage terms at the moment, with UK Finance data showing a jump in the number of mortgages taken out over 30 and 35 year terms.
Yet brokers questioned how new this trend really is, noting that borrowers have been looking to stretch terms in order to meet affordability requirements for years. They also argued that due to overpayments and the ability to change the term in the future, it need not be a cause for concern either.
Little alternative
Richard Dana, CEO of Tembo Money, pointed out that for some borrowers the only way to pass affordability tests was to extend the mortgage term, even with the knowledge that it will end up being more expensive.
He continued: “Whilst there is significant uncertainty around the property market at the moment, historic performance suggests that over the medium and longer term it is a good investment. So the additional interest paid may well be recouped in gains made in property value.”
Daniel Knott, mortgage adviser at Active Financial, reported seeing more first-time buyer clients preferring to go for longer terms in order to keep payments “to an absolute minimum” during the early years.
He added: “Some homebuyers are being cautious due to a worry of where the economy may move.”
Dominik Lipnicki, director of Your Mortgage Decisions, said that given the challenges of recent years for some a longer-term mortgage is the only affordable option.
He noted that clients are increasingly likely to opt for a 30 or 35-year mortgage term, and suggested the trend was here to stay.
He continued: “Lenders have become far more accommodating when looking at longer terms and most mortgage schemes allow overpayments, meaning that when affordable, the term can be shortened. The key here is to ensure that the term is suitable for the borrower at any one time; reviewing the term during the remortgage review is key.”
This is nothing new
Borrowers looking for longer mortgage terms is nothing new, argued Richard Campo, founder of Rose Capital Partners, who said he cannot remember arranging a mortgage for a typical first-time buyer over a 25-year term.
He continued: “Going back to the 80s and 90s it was rare that property was more than six to eight times the average income but now that is standard. People are having to borrow more versus their income and therefore they are arranging loans over a longer period in order to make that more manageable, certainly in the early years at least.”
Martin Stewart, director of London Money, agreed that this trend had been ongoing for some time, rather than being a recent phenomenon.
He slammed suggestions that borrowers opting for longer terms could cause a “systemic issue” in the future, emphasising that: “A mortgage term is a financial planning tool and any decent broker will use that to help clients manage their mortgage, not just for the initial purchase but at every subsequent review when the term can be altered depending on client circumstances at the time.”
He noted that while more interest will be payable if a longer term is selected, the reality is that “if no one wants to pay interest, then don’t take out a mortgage”, while arguing that so long as borrowers have the repayments under control, that is all that really matters.
Changing plans
It’s important for borrowers to understand that just because they opt for a lengthy term at the outset, they can reduce that term in future, pointed out Aaron Strutt, product and communications director at Trinity Financial.
A mortgage term that runs for 30-35 years is not an “unusually longer term”, particularly for first-time buyers pointed out Samantha Bickford, mortgage and equity release specialist at Clarity Wealth Management. She added that it is important for the industry to stop viewing a 25-year term as standard.
She added: “Lots of first-time buyers are on a salary trajectory which mean in a few years when they remortgage they may be able to afford higher repayments with their increased salary. They can then make changes to the mortgage to reduce the term when this is more affordable in the future.”
Changing life stages was also pinpointed by Sebastian Riemann, director of Virtus Private Finance, who said that what commonly happens is that borrowers stretch their term early on, and then as time passes they overpay or reduce the term as and when they can afford to do so.
He added: “A shorter term will always be best, but not to the detriment of making the monthly payments. Each case always has to be assessed on its own merits and I am not seeing any particular spike in increased mortgage terms with the clients we are dealing with.”
Understanding the client
Campo emphasised the importance of organising a mortgage to the client’s budget, suggesting that “you simply aren’t doing your job well enough as an adviser” if you always recommend the same term.
He added: “If a client says they can pay £3,000 a month for the mortgage, and that works out at a 23 year term, then that is the term you recommend. It is also worth clarifying with the client if the budget includes both mortgages and protection, or if there is a budget for each? Either works but unless you establish that at the start, you will end up not protecting the mortgage correctly which is also a failure of advice.”
A similar point was made by Knott, who emphasised that there is no one-size-fits-all solution when it comes to mortgage terms.
“It’s essential that the applicants are aware that a longer mortgage term will mean paying interest over a longer period, however, for the right applicant this may be the most suitable solution,” he said. “The advice is always specific to the individual’s circumstances and goals.”
This was echoed by Bickford, who said that it is crucial to take into the account the client’s budget and future plans in order to find the right term for them.
“For example, this might be a 28 years and three month term, instead of a 30 year term, as this is what is affordable and comfortable for them. The mortgage will be paid off one year and seven months earlier than a round 30 year term.”
