40 year mortgages. Should lenders be doing more?
Sprive is seeing more and more lenders sell 40-year mortgages while doing nothing to encourage early overpayments. We're keen to see lenders do more to minimise the number of people heading for retirement still burdened with a mortgage.
In recent years have seen 40-year mortgage terms become the norm as a desperate measure to enable ‘affordability’ despite radically ramping up the total cost of homeownership. Yet lenders enjoying the additional profits are not making it easy or even encouraging people to make early overpayments as a countermeasure. The result will be millions of Britons finding themselves in their retirement still burdened with mortgage repayments they will struggle to pay.
As increasing house prices have continued to outpace growth in average earnings, homeownership has become an increasingly difficult ambition. The age of first-time buyers has moved from the late twenties to the later thirties and older. Lender income multiples have reached quite scary levels with x7 income becoming an increasingly common offer. And over the last few years, more than 50% of new mortgage offers have been for 40 year terms.
While rising house prices have historically been a major help to the people who got on the ladder early enough, and have become a British obsession as a measure of economic success, the relentless climb of prices faster than earnings is likely to be a ticking timebomb. As lenders find new ways to try to make things more affordable, most of these increase risk for the buyer and in the case of 40-year terms, add huge additional costs in the long term, while creating every chance people will still be making mortgage repayments into their retirement.
More than 3 million people in Britain expect they will still be repaying their mortgage beyond their retirement age. 19% of these people are worried that they will not be able to afford the repayments when their income drops when they retire. 58% of them have no plans for how they will repay the outstanding debt.
Jinesh Vohra, founder, and CEO of Sprive said, “Lender innovation can be a useful thing when trying to help people struggling to get on the housing ladder, andmany like the impact a 40-year term makes on their monthly costs. But we think the sting in the tail is not made clear enough – that you will pay radically more in the long run, and you run the risk of trying to afford mortgage repayments into retirement.
“We are calling for lenders to do more to help these people by coming clean about the additional costs, and how interest rate payments are weighted to the earlier part of the mortgage. This should go hand in hand with encouraging and facilitating overpayments, especially in the earlier years when they will have the biggest impact.
Most lenders have added the awkward step of forcing their customers to call their bank if they want their overpayments to have the effect of helping them pay off their mortgage faster. Even removing simple hurdles like this would make a huge difference.
“It simply isn’t good enough for lenders to push 40-year terms because it makes monthly costs lower without due risk warnings and proper promotion and provision of the countermeasure of overpayments, especially in the earlier years.”
For example, a £250,000 mortgage at 3% interest for 40 years would cost a homeowner £179,473 in interest, however the total interest on the same mortgage but with a 25-year loan would only be £105,597. Now if you were able to make equivalent overpayments of £5 extra a day on a 40-year mortgage, this would save you £48,047. If you were able to stretch to an extra £10 a day towards your mortgage then this would save you a whopping £75,235!
When is the last time your lender told you this when you took out a new mortgage?