Mortgage interest rates crisis drives more than half to opt for 30-year plans
Research from the Bank of England has revealed that one in four mortgages will end when the mortgage borrower is in retirement.
Martin Lewis speaks on loans and mortgages
More than half of mortgage borrowers now opt for a 30-year mortgage or longer, new research has found.
Research from the Bank of England has revealed that one in four mortgages will end when the mortgage borrower is in retirement, but some experts believe the issue may not be as worrying as it seems.
In 2021, 41 percent of mortgage borrowers chose a term of 30 years or longer, however, this increased to over half (51 percent) in 2023. This come against the background of repossessions jumping by 28 percent.
From 2021 to 2023, the average mortgage term length for a first-time buyer rose by one year, from 28 years to 29 years.
A major contributing factor to these longer mortgages is the hefty increase in the average property cost, which is now seven times the average person's salary. This is significantly higher than the four to five times salary cap that many mortgage lenders use as a guideline and potentially concerning for those looking to enter the property market.
An increase in the term lengths has been seen across all residential purchase and remortgage customers, as well as buy-to-let purchase customers.
Mortgage applicant type | Average term length in 2021 | Average term length in 2023 | Increase |
First-time buyer | 28 | 29 | +1 year |
Home mover | 25 | 26 | +1 year |
Remortgage | 21 | 23 | +2 years |
Buy-to-let purchase | 23 | 24 | +1 year |
Kellie Steed, the mortgage expert at Uswitch said: “According to the Zoopla house price index, the current average property value in the UK is £264,500, which means someone on an average salary (£34,900) would need to borrow more than 7 times their annual salary to take out a large enough mortgage to buy it. The vast majority of lenders cap their lending way below this, at around 4-5 times annual income.
“It’s unsurprising, therefore, that many are resorting to ‘mammoth mortgage’ terms in order to stretch their affordability to the absolute maximum.
"However, first-time buyers are not the only ones affected. There has been a less significant, but certain increase in average mortgage term lengths across the board since the Bank of England base rate began to rise in December 2021.”
Miss Steed continued: "Put simply, the longer your mortgage term, the smaller your monthly repayments. Borrowing the same amount over a longer term stretches your affordability, potentially reducing unaffordable monthly repayments to affordable ones.
“After analysing Mojo Mortgages’ data, we can reveal that in 2023, the average first-time buyer borrowed £189,693 at an interest rate of 5.27, over a term length of 29 years. Their monthly mortgage repayments stood at £1,065.
“However, if they were to extend their mortgage terms to 40 years, this would decrease their mortgage payments by £116 per month.”
Term Length | Monthly repayment |
29 years** | £1065 |
33 years | £1011 |
37 years | £972 |
40 years | £949 |
The pros and cons of ‘mammoth’ mortgage lengths
Pros:
It aids affordability, stretching your income to maybe afford a more costly property, or allowing you to buy one sooner
In the case of remortgaging, it could reduce your monthly outgoings, or potentially allow you to remortgage where rate hikes have impacted your affordability
Cons:
The longer the term, the more interest you pay
Longer terms increase the likelihood of repaying your mortgage into retirement
Taking out the maximum term length at the beginning of a mortgage leaves less wiggle room if you need to extend it to aid affordability down the line
Repaying the loan more slowly means your equity (ownership in the property) also grows more slowly - this could increase the risk of falling into negative equity, which is where you owe more than your property is currently worth
