I recently wrote about a relatively new phenomenon in mortgage lending – the growing propensity of mortgage borrowers to pay exorbitant redemption fees in order to transfer their loan to a cheaper competitor. Even after factoring in the redemption fees, borrowers can save thousands of dollars if they commit to a four- or five-year mortgage term with a new, less expensive lender.
Such an action is understandable, but changing mortgages every few years does not always produce great results; it can be a costly (and administrative) chore, which is why the Treasury wants to encourage more lenders to offer longer-term loans at fixed rates, similar to those widely available in the United States.
This week, a private insurance company, Rothesay Life, revealed its intention to offer fixed rate mortgages for up to 30 years to UK borrowers, “thus contributing to the government’s ambition to bring to market mortgages offering long-term certainty, âaccording to the company’s website.
Very long-term mortgages already exist: online broker Habito offered a 40-year fixed rate mortgage, while at the start of the year London-based mortgage lender Perenna launched mortgages ” fixed for life â. According to the company’s website, âPerenna aims to offer 30-year fixed rate mortgages up to 95% LTV [loan-to-value] with the possibility of changing at no additional cost after 5 years.
Perenna’s offer is so popular that potential borrowers have to put on a waiting list before they can apply for a home loan. This is good news for Rothesay Life.
Longer-term mortgages are particularly attractive to young people, especially those who want to step up on the property ladder, as they allow buyers to spread repayments over a period of up to four decades. Plus, taking out a super long-term mortgage can be a hugely effective way to cut monthly expenses, although it’s worth doing your math before you take out.
Property values ââhave increased dramatically over the past decade, in part due to the immediate availability of cheap money, the demand for which has been driven by historically low interest rates. Yet despite this, a growing number of aspiring homeowners would struggle to pay off a traditional 25-year mortgage. The extension of the term of the mortgage loan gives these borrowers considerably more financial leeway.
However (there is always a “however”), although a very long term mortgage is likely to be attractive to young borrowers, as it could help them gain that important foothold on the UK property ladder. Uni, the longer term cost should be noted.
For example, homebuyers borrowing Â£ 175,000 over 25 years at a fixed interest rate of 2.5% would face a monthly mortgage bill of Â£ 791.52, the equivalent of Â£ 237,456 over the term of the mortgage.
True, a 40-year mortgage would cut monthly payments by more than a quarter, to Â£ 580.94, although over the life span borrowers would pay Â£ 278,851, or Â£ 41,395 more than the mortgage product at more. short term.
In other words, while the 40-year mortgage would undoubtedly prove to be useful for people wanting to move up the real estate ladder, there is a risk that some homebuyers could still pay off their mortgage at the end of the day. retirement.
It follows that borrowers should consider the pros and cons of a super-long-term mortgage before getting started.
As we have seen, the biggest benefit of paying off a mortgage over a longer period is a noticeable reduction in monthly costs. Not only does this make homeownership more affordable, lower spending puts less of a burden on disposable income.
Note also that by reducing mortgage payments, home buyers can theoretically acquire a larger property.
In contrast, paying off a 40-year mortgage means buyers will pay considerably more over the life of the loan than they would if they had a traditional 25-year product.
Plus, the final repayment (assuming buyers haven’t paid off their mortgage sooner) is likely to be made later in life, perhaps after the date they had hoped to retire. It is therefore possible that a longer mortgage will affect other plans and aspirations, a point to consider before committing to a long-term mortgage.
It’s fair to say that committing to an initial 40-year mortgage term doesn’t necessarily mean buyers will be burdened with it forever. Most mortgage lenders allow borrowers to overpay, reducing both the outstanding principal and the length of the mortgage. In addition, once buyers have more disposable income, they are also likely to have the option of remortgaging their home for a shorter period of time.
Overall, longer term, fixed rate mortgages are likely to be attractive to potential home buyers; Then there’s the added bonus that borrowers won’t need to spend time researching better deals every few years.