Are mortgages with a 25-year term in the UK a thing of past?

The traditional UK mortgage term is 25 years. However, with the escalating house prices, and now dramatically higher borrowing costs, many people are “going long” on home loans.

Steve Webb, former minister of pensions, revealed on Monday that young homebuyers are increasingly being forced to gamble with retirement prospects when they take out ultra-long mortgages beyond the end their working lives.

Ex-Liberal Democrat Mp published data obtained through a Freedom of Information request indicating in the last three years more than 1m mortgages were taken out that extend beyond the age at which the state pension is currently payable.

Webb made the request as a response to a report by the Bank of England’s Financial Policy Committee, which revealed that nearly half of the new mortgages issued during the last three months of 2023 had terms of at least 30 years.

UK Finance, the trade association for lenders, has released separate figures showing that, by 2023, nearly one fifth of first-time homebuyers will have arranged their mortgages over a 35-year period, up from less than one tenth a year earlier. In 2005, the average mortgage term of a UK first time buyer was 25-years. By mid-2022, this had risen to 30-years.

Ray Boulger, of John Charcol broker, says that the quarter-century period was chosen because most mortgages up until the year 2000 were tied to endowment policies for which 25 years is considered optimal.

Boulger says that since more than 90 percent of mortgages for house purchases are on a repayment schedule, there is no reason to limit the default period in a repayment mortgage at 25 years, or any other specific term.

A longer repayment term is primarily driven by affordability. Spreading out the payments over a longer period reduces your monthly payment.

The UK has seen a need for longer repayment terms due to high house prices, rising student debts, and couples having children at an older age.

David Hollingworth, broker L&C mortgages, says: “But I think what has helped accelerate this [demand] in recent years is the fact rates are so much higher now.” “You would get people to go beyond the 25-year tradition, but then they’d be at around 30-years.” We are beginning to see the percentage of people going the full 40 years begin to increase – effectively maxing out.”

If you take out a £200,000 mortgage repayment at 4.5%, then you can expect to pay £1,111 per month over a 25 year term. If you change it to 30, the monthly payment drops to £1,013 After 35 years, it’s £946, while at 40 years old it’s £899 — a monthly savings of £212 over signing up for 25.

If you are a potential borrower who is unable to get the mortgage that you want in a shorter period, the only way for them to do so may be by increasing the term of your loan.

In March, UK Finance provided a graphic showing how affordability pressures are increasing as interest rates and housing prices rise.

The study looked at the typical first-time home buyer in 2022 when the average mortgage was 30 years. In order to reach the same affordability, as measured by the monthly payment compared to income, the buyer would need to borrow for a period of 50 years. In December last year, the rising mortgage rates had increased this to 72-years.

UK Finance has been quick to point out that a term of 50 years, let alone 72, is outside the criteria for even the most generous lenders.

The banks and building societies, however, have made it easier for consumers to lock themselves into ultra long mortgages. Financial data provider moneyfacts reported that 79% of residential loans on sale at the end April of this year had a maximum of 40 years. This is up from 68% of mortgages in August 2023 and 57% of mortgages a year ago.

Vida Homeloans is one specialist lender that has recently moved to 45-year fixed rate deals. Others could follow. launched products by Perenna late last year. Originally, Perenna offered loans lasting up to 30years, but is now offering a maximum 40years. Arjan Verbeek is its chief executive. He says that the company has experienced “very strong demand”.

Not only first-time homebuyers are opting for a longer mortgage term. Many people who will be facing higher monthly payments when their current deal expires, have extended their mortgage or are thinking about it.

A longer mortgage term can lower your monthly payments, but you’ll pay more in interest over the course of the loan.

Over a period of 40 years, the total interest payable by the borrower on the £200,000 loan would be £231,000.

The policymakers are clearly concerned about the increasing popularity of marathon mortgages, and the risks they may pose to financial stability. Some people are putting themselves in a difficult situation by taking on a large debt, which they will have to pay off even after they retire or start receiving their pension.

The FPC warns this trend could “affect future borrower and lenders resilience”. Longer terms also mean “a greater risk of debt being forced into old age”, and less financial flexibility. This could, in turn make borrowers more sensitive to negative events.

You may have also reached your mid/late/early 50s, and paid off or broken down your mortgage. This gave you some valuable years to put as much money into your pension as you can, in order to increase your retirement income. This window of opportunity is now or soon to be closed for many.

Equity release has become more popular among people aged 60 and older to pay off mortgages. Some people who sign up for a longer term mortgage will see their financial situation improving over time. They can then reduce the length of the loan or make extra payments to lower the amount they owe.

Boulger says that just because a mortgage of 35 or 40 years is more expensive, it does not mean that it is a bad thing if you want to own your home. It is better to own your home than rent for your entire life, even in retirement. And very few people keep their mortgages for that length of time.

Boris Johnson, the former prime minister at the time, was reported to have been considering mortgages with longer terms in July 2022 as a means of tackling the housing crisis. Ironically, Liz Truss’s September 2022 mini budget, which set the stage for higher mortgage rates, could make it more likely that half-century loans will be available.