How to afford your starter home: take out a 50-year loan
Sunday 16 April 2006
Would-be homeowners all but priced out of today's housing market are considering ever more radical ways of getting round the problem of short-term affordability.
With the average house price paid by first-timers standing at £137,122, according to figures from the Halifax, brokers report that a growing number are looking to extend the term of a repayment mortgage beyond the standard 25 years to 30, 35 or even 40, 50 years - and cut their monthly commitments.
"Twenty-five years is traditional but fairly arbitrary," says Melanie Bien of broker Savills Private Finance. "As affordability is a problem, more borrowers are going for longer deals."
Extending the mortgage term is most commonly an option considered by those who can't rely on parents helping out with the deposit (so bringing down the rate) or who don't want an interest-only loan that requires a separate savings vehicle.
A survey by broker Purely Mortgages found a quarter of aspiring first-time buyers would happily repay their mortgage over 30 years, 6 per cent would go for a 40-year term, and 5 per cent would be prepared to spread their repayments over 50 years.
However, longer-term mortgages do come at a price. Say a property costs £200,000: with a 20 per cent deposit and a standard loan rate of 5.7 per cent, the repayments over 25 years would be £1,020.78 a month for an overall cost of £306,564, says broker Mortgage Advice Bureau (MAB).
Compare this with a 40-year term, it adds, where the monthly payment drops to £868.64 but the overall repayment is £417,277.
But Louise Cuming, spokes- woman for the price-comparison service Moneysupermarket.com, says that if a long-term mortgage is taken out for only a couple of years, it can be cost-effective - "as long as you remortgage to a shorter-term [deal] sooner rather than later".
That said, stretching a mortgage term to reduce payments can be a risky move - particularly given that the average age of a first-time buyer has now risen to 33. "Not only will a longer term mean the overall cost of borrowing is higher, but it may never be the 'right time' to remortgage and take on the higher payments. That could leave a serious problem well into retirement," warns Brian Murphy, lending manager at MAB.
Ms Bien says lenders will consider letting you carry a mortgage on into retirement only if you have enough guaranteed income to service the loan.
"Having to repay a mortgage on a significantly lower income [in retirement] could be a real worry," adds Ms Cuming. "No lender wants to face the prospect of chasing arrears from the more vulnerable and elderly."
She adds that while a range of lenders, including Alliance & Leicester, Halifax, and Chelsea and Nationwide building societies, offer mortgages with a 40-year term, only HSBC and Royal Bank of Scotland Intermediary Partners actively promote 50-year mortgages. "And the latter has a maximum age at planned redemption of 70," says Ms Cuming. "So unless a prospective borrower is 20 or under, the maximum term is not available."
Most lenders don't charge just to change the length of your loan, but some, like Alliance & Leicester, impose a small £25 administration fee.
Gary Buchanan, 29, from Newtownards near Belfast, remortgaged recently to allow him to consolidate some debts.
"The term has been extended to 35 years to keep the monthly payments as low as possible - making it far more affordable," he explains.
The remortgage involved switching his £68,100 home loan to a five-year fixed-rate deal with Northern Rock at 5.89 per cent.
His broker, Purely Mortgages, recommended Northern Rock because the lender is flexible on income multiples.
Independent Partners: Get fee-free expert mortgage advice and find the right mortgage deal for you.
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