35-Year Mortgages Becoming the Norm in the UK

January 19, 2016 No Comments »
35-Year Mortgages Becoming the Norm in the UK

Across the pond, a dangerous mortgage trend is emerging. In order to keep up with monthly housing payments, new homeowners are opting for 35-year mortgages at a higher and higher rate.

The obvious reason being that the 35-year mortgage is a more affordable option than the more traditional 30-year loan.

Interestingly, 20- and 25-year mortgages are actually the norm in Britain, so the fact that 35-year terms are growing in popularity is worrying, especially at a time when mortgage rates are still near record lows.

More Than a Quarter of First-Timers Took Out 35-Year Terms in 2015

New data from Halifax Bank, the largest residential mortgage provider in the UK, revealed that 26% of first-time home buyers went with 35-year mortgages last year.

This is up significantly from figures seen before the global financial crisis when just 15% of mortgages had terms of 35 years.

Back then, nearly half (48%) of mortgages had terms between 20 and 25 years. Last year, some 30% had the routine 20 to 25-year term.

The issue is rising home prices, which have increased roughly 10% in the past year alone. This has made it difficult for first-timers to manage affordability, despite those low interest rates.

As a result, more and more borrowers are opting to extend their mortgage amortization to push payments lower.

Lower Payment, Way More Interest

For example, a $200,000 mortgage set at 4% with a 25-year term has a monthly payment of $1,055.67.

If we increase the term to 35 years the interest rate will probably be higher, say 4.25%, but the payment drops to $915.79 per month.

This is great for the struggling homeowner looking for more affordable payments. But there are two huge negatives.

First, the 35-year term means many of today’s older first-time buyers are taking on a mortgage that will extend into their retirement, assuming it’s held to term.

Secondly, the amount of interest paid on a 35-year term is much higher than that on a 25-year loan.

The longer term results in nearly $185,000 in interest over the full term. Interest due on the 25-year loan is just short of $117,000 over those years. And you own your home free and clear a decade earlier.

While this trend applies to the UK, it’s important for American homeowners to understand the implications of choosing a certain mortgage term.

Fortunately, 40-year mortgage terms were mostly outlawed last year thanks to the Qualified Mortgage rule, which doesn’t allow a term beyond 30 years.

However, lots of loan modifications doled out to homeowners over the past several years include term extensions.

While the longer terms boost affordability, they also mean these homeowners won’t own their homes for a very long time. And if home prices dip again, these borrowers could fall back into underwater positions.

It’s not to say we should all select 15-year mortgages – for most individuals they wouldn’t qualify due to DTI issues and the like. But do recognize the fact that a longer term means less home equity now and a lot more interest paid over the years.

So if and when these types of products make it back stateside, proceed with caution.

(photo: Marcin Wichary)

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