Longer loan terms could spread a little happiness
With retirement ages edging ever higher, longer loan terms could be a good option, says Stephen Pritchard
Wednesday 24 May 2006
We've already heard that the retirement age may rise to 68, but how will this impact on the standard term for a residential mortgage? As more companies scrap their final salary pension schemes, more of us will need to work longer, in order to build up a large enough retirement fund.
The mortgage industry has been slow to catch up. Some lenders require borrowers to pay off the sum by the time they reach 65, even for those who employers allow them to work beyond that age.
According to Ray Boulger, of mortgage brokers John Charcol, such arbitrary limits are untenable. If the retirement age does rise, then lenders' policies will have to change, especially if borrowers are able to support the loan from their pension or other income, he says."The challenge for lenders is making sure that the mortgage is affordable. In many cases, the buyer's pension income will be more than able to meet the repayments."
The price rises of the last few years could also affect average mortgage terms. Someone who wants to move at the age of 50 might not be able to afford the higher repayments for a 15-year term - necessary if they wanted the loan repaid in full by the standard retirement age.
Also, younger buyers might want a term of 30, 40 or 50 years, to bring down the cost of the monthly repayments. During Japan's housing boom, for example, buyers could take out a mortgage for 100 years. The downside is that the total bill for the mortgage interest is much higher.
Moneysupermarket.com calculates that a 40-year mortgage, based on a two-year fixed rate from the Chelsea Building Society and then its standard variable rate for the rest of the term, would cost £412,040 for a £175,000 property with a 95 per cent mortgage. This is £109,168 more than if the buyer had opted for a 25-year term with the Yorkshire Building Society.
But some analysts warn that simply comparing the cost of a mortgage over 40 or 50 years with a 25-year term is unrealistic. In reality, few buyers stay with the same mortgage, or in the same house, for that time. And buyers taking out loans over longer terms may well do so with a view to short-term affordability. They will then remortgage to a 25-year term, or pay off the loan ahead of time.
HSBC is one lender that will arrange a mortgage for 40 or 50 years. It has found that buyers who do opt for a longer term have very specific requirements. "It might be because the buyer knows that their earnings will be good in the future, because they are entering one of the professions, or because they are buying in an expensive area, such as London," says Barry Blackshaw, HSBC's senior product manager for mortgages. But the bank has not, as yet, seen a significant increase in demand for such loans.
At John Charcol, Boulger agrees that longer terms work best as part of an overall financial plan. A new graduate could, for example, use a 40- or 50-year term to get on the property ladder sooner, or to avoid moving house after three years by buying a better home in the first place. With moving costs ranging from £15,000 to £20,000 in parts of the UK, this can make financial sense.
An extended mortgage term can also work well for buyers who have the discipline to make regular overpayments. If a buyer falls behind on a 25-year term they will damage their credit rating. If they set a more affordable, longer term and make overpayments, they can stop overpayment and even borrow the money back on many mortgage deals. They also have the option of switching to conventional mortgage term later on.
"A lot of people simply assume a mortgage has to be over 25 years," says Boulger. "But because most mortgages allow at least some penalty-free overpayments, you still have the option of paying back the mortgage early, without committing to a shorter term loan that could be a real struggle."
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