First-time buyers fall into the trap
With house prices soaring in recent years, home-owners have been backed into a corner to take mortgages over a longer term, to make them affordable. Traditionally, mortgages were 25 years, where as now 30+ years is the norm. 40 year mortgages can result in tens of thousands of pounds extra in interest payments.
This does not constitute advice and advice should be sought in all instances before acting on it.
Your property may be at risk should you be unable to maintain any agreed mortgage payments over the term agreed.
Making mortgages affordable
The increase in house prices means borrowers have two choices. One, is higher monthly repayments for a shorter duration. The second is smaller monthly repayments for a longer duration.
Most young people opt for the second option, as it allows them to take a bigger loan to purchase their dream home.
On the other end of the spectrum, the lenders, who have to conduct stricter affordability tests, don’t have much room to manoeuvre with offering larger loans to those with a regular income. However, there are no rules limiting the mortgage length so they have made available 30, 35 and even 40 year long loans.
“Now 60% borrow for longer.” Simon Gompertz for BBC News
What four decades of interest may look like
The attraction of course with a longer term mortgage is significantly lower monthly repayments.
A £300,000 mortgage taken over the traditional 25 years would cost a borrower circa £950 per month, however, over 40 years the monthly repayment reduces to just over £700 per month, saving over £200 per month.*
However, whilst monthly affordability is important, the extra 15 year’s of interest, using this example, would be an additional circa £60,000.
It’s a big danger for first-time buyers who are keen to take bigger steps onto the property ladder. Few really understand that they will pay tens of thousands of pounds extra over the whole mortgage term.
*broad figures for a Nationwide mortgage
Mortgage planning to save money and avoid the trap
Many first-time buyers are riding on the hope that house prices continue to rise and they can cash-in equity on their property at a later date.
Whilst this is one mortgage planning strategy, it holds some uncertainty as no one can predict the future market.
A better solution is to remortgage and reduce the loan term as soon as you are able to afford the higher monthly payments. This way you can save thousands of pounds in the longer term and not drain your future financial wealth.
If interest rates rise, or if the family income remains static, this is where families can end up being trapped for years in the same home, with the same mortgage payment and it can become a burden in later life.
The best option is to keep a regular review of your mortgages, with the help of a qualified mortgage adviser who can provide guidance on the options available to you.
Need mortgage advice? Speak to Chris
Dental & Medical Financial Services can help with finding the most suitable mortgage for you and conduct regular reviews. Call Chris to discuss your requirements.
Tel: 01403 780 770