How 40-year mortgages put first-time buyers’ futures at risk

The rise of 40-year mortgages is putting first-time buyers’ retirements at risk – and could cost some £100,000 more in interest.

Ultra-long mortgages will ‘come home to roost’ as households are left with less money towards retirement, said banking trade body UK Finance.

Borrowers are taking out more home loans lasting up to four decades, as they struggle to get a foot on the property ladder amid high house prices and increased mortgage rates.

The long-life mortgages cost far more, with £200,000 borrowed over 40 years instead of 25 racking up £112,000 in extra interest. 

One in five mortgages for first-time buyers is for a term longer than 35 years – twice the proportion seen just two years ago. In 2005, it was only 2 per cent.

Borrowers are taking out longer loans in order to squeeze monthly payments down and fit into affordability-based lending criteria, but they can create longer term financial risks and costs. 

Britain’s big bank trade body UK Finance warned in a report: ‘The longer a customer needs to make mortgage payments, the less free income they may have over this period for other important considerations, not least contributions into their pensions.

‘This trend of longer-term borrowing has the potential for wider societal implications, albeit that these may not come home to roost until some years down the track.’

This is Money’s long-life mortgage calculator highlights how while extending a mortgage term cuts monthly payments now, it costs far more over the lifetime of the loan.

For example, a £200,000 mortgage with an average rate of 5 per cent over 25 years will cost £151,000 in interest but over 40 years it would see £263,000 in interest charges rack up 

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Before the financial crisis, 25 years was a standard mortgage term, but that began to creep up and the average first-time buyer term is now 31 years. 

Extending this to 40 years, sees interest charges shoot up.

Borrowing £200,000 over 31 years with an average 5 per cent rate would incur £194,000 in interest.

But borrowing over 40 years would see £263,000 of interest charged – costing first-time buyers £69,000 extra over the life of their mortgage.

UK Finance’s report said: ‘The small but increasing minority of both home mover and remortgage customers borrowing at these longer terms points to more entrenched affordability issues. 

‘Rather than just stretching terms as a means of improving affordability in order to enter the housing market, more customers are needing to do this in subsequent mortgage transactions, further on in their homeownership journeys and their working lives. 

‘This longer term borrowing all takes place within FCA responsible lending rules, including those cases where the term stretches into retirement.’

Long-life mortgages began to dramatically pick up as interest rates rose in 2022 to tackle soaring inflation and shot up further in the wake of Liz Truss’s mini-Budget in September of that year when borrowing rates soared.

At the start of that year, loans stretching more than 35 years represented just 8 per cent of first-time buyer mortgages. But that rose to 17 per cent by the end of 2022 before peaking at 23 per cent in December last year.

Although mortgage rates have eased from their highest levels, the proportion of extra-long deals was only down to 21 per cent in March.

UK Finance said the proportion of loans with terms up to 40 years ‘remains far higher than we have seen in the past’ for ‘all types of borrower but most significantly among first-time buyers’.

David Hollingworth, an associate director at broker L&C Mortgages, said: ‘Taking a mortgage over a longer term may help with the initial monthly payments but the cost will mount up substantially over time.

‘Borrowers need to be disciplined in reviewing the term, or overpaying wherever possible, to reduce that burden.

‘If not, it will continue to have a bigger impact on disposable income for longer, which could have knock-on consequences for saving and for resources in retirement.’

Former pensions minister Baroness Altmann said: ‘If the only option for people is to get a longer-term mortgage then for many that is better than paying rent which will also prevent them saving.

‘The issue for me is to ensure lenders don’t profiteer on these long-term loans as borrowers do end up paying back more the longer the term.’

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