What does this show?
The chart illustrates the steady growth in the proportion of mortgage borrowers signing up for lengthier repayment terms. All types of borrowers — first-time buyers, home movers and those remortgaging — are opting to take longer to repay their loans, according to data from the Council of Mortgage Lenders, which represents lenders accounting for 95 per cent of residential lending.
Nearly 60 per cent of first-time buyers choose a mortgage longer than 25 years — double the proportion of a decade ago. The CML says the median term length for first-time buyers has gone from 25 to 30 in just a few years.
The issue was underlined this week after Halifax moved to raise the maximum age at which home loan repayments can be completed from 75 to 80, as of Monday. Older borrowers often struggle to get a mortgage when banks, wary of lending to those with uncertain income, typically set the upper age limit at 75.
If interest rates are so low, why are longer term lengths necessary?
Rock-bottom interest rates help buyers, but affordability has moved further out of reach in recent years because of higher house prices and tightened regulations. Prices have risen steeply in many parts of the UK in the past decade and first-time buyers require bigger deposits to make a purchase add up. The Mortgage Market Review, a set of new measures brought in by the City watchdog in 2014, make it tougher for lenders to hand loans to buyers who cannot prove they can pay them back if and when interest rates rise.
What sort of term lengths are we talking about?
Borrowers are asking for anything up to 40 years, which is a big jump on the standard 25-year repayment mortgage. A longer term length means they pay less back each month as the loan is stretched out over a longer period. This makes it possible for borrowers to squeeze in under the tighter affordability requirements.
So if it gets them over the hurdle, what’s the problem?
The longer you take to pay off your mortgage, the greater the chance you will experience a change in your financial circumstances that might affect your ability to pay it off. There are concerns about lending to people who may still be repaying their loan into retirement. Over the past 10 years, the proportion of all mortgage loans extending into retirement has gone from a quarter to 40 per cent, the CML says.
As the UK population ages and the trend for people to work into retirement picks up, this may be feasible for some. But the regulatory regime has yet to catch up with these demographic changes: mortgage providers are concerned about lending to people who may not be able to repay, particularly when they are now obliged to lend responsibly and “treat customers fairly” under the MMR rules. Lenders are understandably reluctant to be put in a position where they are repossessing the home of an elderly borrower.
Are there any alternatives?
Yes, though the options are limited. The Financial Conduct Authority, which regulates the residential mortgage market, has highlighted the market for older borrowers as a “core challenge” for lenders and is considering whether to change the rules to encourage providers to innovate in the equity release market, which has so far remained a specialist niche subject to separate regulations.
If mainstream lenders did get behind equity release, the value of housing stock that could be unlocked is significant: 83 per cent of over-60s in England own their own home, 64 per cent without a mortgage. “This amounts to a massive £1.23tn in unmortgaged housing wealth,” the CML says.
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