Key points –
- A record 20% of first-time homebuyers in the UK are opting for mortgages exceeding 35 years, primarily due to high housing prices and increasing cost of living.
- These longer mortgages offer lower monthly payments but result in more interest over time, leading to higher total costs.
- The rise in the Bank of England’s interest rates, from 0.1% in December 2021 to 5.25% currently, has significantly impacted the trend towards longer mortgage terms.
- The Office for National Statistics data shows that the average house price in England was 8.4 times the average income in the year ending March 2022, indicating a persistent affordability challenge.
- Longer mortgages raise concerns for future financial planning, especially for those who may still be paying them off into retirement.
Around 20% of first-time homebuyers are now opting for mortgages extending over 35 years. This trend, highlighted by UK Finance, underscores the challenges faced by new homeowners in balancing the dream of owning a house with the realities of high interest rates and escalating living costs.
Longer Mortgages: A Necessity or a Choice?
Traditionally, longer-term mortgages were less common, but the current economic environment is changing this. By choosing a longer mortgage, first-time buyers reduce their monthly payments, making homeownership more attainable in the short term. However, this comes with a catch: these mortgages accumulate more interest over time, ultimately costing more.
For buyers in their mid-30s, this could mean they’re still paying off their mortgage into their 70s. With the average age of a first-time buyer at 32.8, this is a critical consideration.
Interest Rates and Cost of Living: The Impact
The Bank of England’s interest rate hikes – from 0.1% in December 2021 to 5.25% today – have significantly influenced this shift. In September, the proportion of first-time buyers choosing mortgages of more than 35 years reached a record high, contrasting sharply with just 2% in 2005.
James Tatch, head of analytics at UK Finance, notes that while this trend was evident through 2023, it seems to be moderating.
The Rising Popularity of Long-Term Mortgages
Mortgages lasting over 30 years are also gaining traction, accounting for 56% of deals among home buyers. Among home movers, one in three is opting for these extended mortgages.
Interestingly, UK Finance suggests that for some, a longer-term mortgage is a choice rather than a necessity, offering the flexibility to reduce the term later.
Expert Insights
Former pensions minister Ros Altmann highlights the challenges: “The dramatic increase in mortgage rates and high levels of house prices have driven first-time buyers to longer-term mortgages.” She warns of the long-term financial implications, particularly for those who might still be repaying their mortgage into retirement.
Cost of Living and Mortgage Pressures
The Office for National Statistics (ONS) reveals that mortgage holders are facing the highest rate of cost inflation at 9.3%, surpassing the 8.2% average. This is a direct consequence of the rising interest rates impacting those with mortgages more severely than renters.
House Price to Income Ratio: A Persistent Challenge
Separate ONS data shows that the average house price in England was 8.4 times the average income as of March 2022. Although slightly better than the previous year, it still indicates that housing is far less affordable compared to 1999, when the average home cost was about 4.4 times the average income.