Affordability challenges lead to 1 in 5 first-time buyers stretching their mortgage term

Faced with affordability challenges, more first-time buyers are choosing to repay their mortgages over a longer period. While it’s an option that might help you manage your outgoings in the short term, read on to find out why it could cost you more overall.

According to a report from UK Finance, at the end of 2023, almost 1 in 5 first-time buyers were borrowing with a term of 35 years or more. This is more than double the number that were doing the same just a year earlier.

A longer mortgage term could reduce your monthly repayment

It’s important to review how a mortgage could affect your finances and that you feel confident in your ability to meet repayments. Struggling with mortgage repayments can be stressful and, if you default, your lender could repossess your home.

One of the main reasons first-time buyers are choosing longer mortgage terms is that it provides a way to reduce their monthly repayments. This could be valuable if your budget is stretched.

For example, if you borrowed £200,000 through a repayment mortgage with an interest rate of 4.5% and a term of 25 years, your monthly repayment would be around £1,111. Now, if you extended the term to 35 years, your monthly outgoing would fall to £946.

At a time when other costs, from utility bills to groceries, have increased, being able to reduce your mortgage repayments could make your home ownership goals more achievable.

However, even though many first-time buyers are increasing their mortgage terms, they’re likely to be worse off financially when compared to 2022 due to changing market conditions.

Indeed, the UK Finance report stated that to achieve the same level of affordability as in 2022, when the average first-time buyer mortgage term was 30 years, buyers in mid-2023 would need to have borrowed over a 50-year term. This was due to changes in house prices, mortgage rates, and incomes.

By the end of 2023, borrowers would have needed a mortgage term of 72 years to achieve the same affordability as in 2022.

UK Finance noted: “A 50-year term, let alone 72 years, sits outside even the most generous of lender underwriting criteria.”

Most lenders will allow some borrowers to stretch their mortgage term to 35 years, and some offer mortgage terms of 40 years. However, your circumstances could affect how long you can pay your mortgage over. For instance, many lenders will want the term to end before you retire.

A longer mortgage term could cost you thousands extra in interest

When you’re reviewing a mortgage term, it’s not only the monthly repayments you might want to consider, but the interest you’d pay too. As interest is added to the outstanding debt, usually every month, extending the term often means you’ll pay much more interest over the full term.

Again, let’s say you borrow £200,000 through a repayment mortgage with an interest rate of 4.5%. If you had a:

• 25-year term, the total interest paid over the full mortgage would be around £133,370
• 35-year term, the total interest paid over the full mortgage would be around £197,337.

So, while extending your mortgage term could make sense in the short term, it may not be financially savvy when you consider your long-term finances.

It’s important to note that you can often change the mortgage term when your initial deal expires. You may choose a longer term when you buy your first home to help you manage your budget, and then shorten it in the future as your finances improve.

The interest rate you pay on your mortgage is also unlikely to remain the same throughout the full mortgage term, too.

As you gain more equity in your property, you’ll often find that you’re able to secure a more competitive interest rate, which would mean your repayments fall. As a result, you might find you’re in a better position to reduce the mortgage term or make overpayments.

Contact us to talk about your mortgage needs

If you’re a first-time buyer and have questions about the mortgage term or the application process, please contact us. We could offer guidance and help you select a mortgage that suits your needs.

Please note:

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.