Most of us are familiar with the idea of the 25-year mortgage. Few home buyers have ever opted for a mortgage with a term of less than this.
However it looks as though the popularity of this term may be waning, and it comes as a direct response to the rising house prices we are seeing in many parts of the country. According to the latest reports, more and more borrowers are choosing mortgages over longer terms. Taking out a mortgage for 30 or even 35 years is becoming more common all the time, and rising house prices are said to be to blame.
Could we see a permanent switch to longer-term mortgages?
It all rests on where house prices go in the future. At the moment there seems to be no let-up in the increases, which are making affordability a problem for many people.
However it is not the ideal situation. The idea is reasonable in itself: by lengthening the mortgage term you have the opportunity to pay less each month to get the property you want. However this brings into focus the possibility of overstretching your finances in a different way.
Affordability is not just a concern for your working years
In the past most people were concerned about whether or not they could afford the monthly mortgage while they were working. Now though, the increasing popularity of the 30-year mortgage (and even the 35-year mortgage) means those worries and concerns are lasting much longer in life.
Over a third of the mortgages in place last year were set to last longer than the once-traditional 25 years (35%). In contrast just eight years ago in 2006 this figure stood at a little over a fifth (22%).
Since many young people are unable to afford any kind of mortgage, as the deposit for a home is so difficult to save for, it means they are not taking on a mortgage until their thirties or older. This in turn means they will still be paying the mortgage when they are retired – and it could have a major impact on their finances. In some cases it might mean the individual has to go on working in order to meet those bills, at a time when they should be relaxing more and enjoying the retirement they have worked towards.
The Bank of England is well aware of this situation and is watching it closely to see how it develops. The Governor of the Bank of England, Mark Carney, is keeping an eye on what happens and has hinted that changes could be made if this trend continues. The suggestion is that the duration of a mortgage could be restricted if more and more people extend the length of their mortgage in order to afford the property they want.
Clearly there are many challenges still brewing in the property market in the UK today. It remains to be seen which solutions are chosen to ensure as few people as possible overstretch their finances.