The 40-year-old mortgage you will pass on to your children: House price boom forces buyers to opt for two-generation loans
By James Chapman
Forty-year mortgages that may take two generations to pay off could become the norm, ministers believe.
Rising house prices will prompt more homebuyers to abandon traditional 25-year loans and opt for ever longer repayment terms, they say.
Cabinet ministers who discussed claims of a new property ‘bubble’ this week believe a cultural shift is under way which means people are increasingly comfortable with extended loans.
In future householders may choose to pass on a house with an outstanding mortgage to their children, who will pay off the rest
They believe that in future householders may choose to pass on a house with an outstanding mortgage to their children, who will pay off the rest.
‘In Japan, the 40-year mortgage is the norm,’ said one Government source. ‘Paying it off is a two-generation job for many families. If house prices remain high, longer-term mortgages like those will become more acceptable to people here.’
As people work into their late 60s and 70s, with the state pension age set to rise, many workers will be in a position to make mortgage payments over a longer period.
UK house prices are set to increase by as much as 8 per cent in 2014
Some lenders agree that improved longevity, combined with higher house prices, make extended loans sensible and viable.
But critics say the average age of a first-time buyer has risen sharply and terms of up to 40 years will leave some facing large mortgage payments well into retirement.
In Canada, Mark Carney, now governor of the Bank of England, worked with the country’s finance minister to reduce mortgage periods from 40 to 25 years to help rein in what was seen as an unsustainable property boom.
Figures show that house prices last month experienced their biggest monthly rise for more than four years.
The average cost of a home rose by 8.4 per cent last year, according to the Nationwide building society. Despite the rises, the average cost of a home, at £175,826, is still 5 per cent below its pre-financial crisis peak in 2007.
But UK house prices are set to increase by as much as 8 per cent in 2014, according to the most optimistic forecasts.
The cost of property means that spreading out repayments over longer periods may enable many families who would not otherwise have been able to afford it to get a step on the housing ladder.
Already, there is evidence that people are opting for longer mortgages. First-time home buyers are taking out average mortgage terms of between 27 and 30 years.
The trend is being driven by a drought in risky interest-only loans, which are cheaper and were used by millions to buy their first home.
Now, 99 per cent of first-time buyers take out a more expensive repayment mortgage. The only way of reducing monthly costs is to extend the life of the mortgage.
Lengthening a £200,000 mortgage from 25 to 30 years cuts £100 a month off repayments, although it adds more than £27,000 to the total eventually paid back. Stretching the term to 40 years cuts repayments by another £120 a month. David Hollingworth of mortgage broker London & Country said: ‘There has certainly been a shift toward longer terms. The majority of borrowers are still opting for terms of up to 25 years but others are certainly taking 30 years and to a lesser degree 35 years. A small number have even gone for 40.
‘It’s not something that is limited to first-time buyer cases though, and there is a growing number of home-movers that are also electing to take a longer term now.’
Santander, which reined in much of its mortgage lending in the aftermath of the financial crisis of 2007 and 2008, has re-entered the mortgage market with loans allowing borrowers to repay over 35 years.
Halifax and Nationwide allow borrowers terms as long as 40 years, but HSBC has a 30-year limit.