If you’re preparing to take out a mortgage, there are plenty of things to consider. Among them is how long you’ll pay back the loan for. As property prices have increased, it should come as no surprise that mortgages are getting longer. More homebuyers are choosing to take out ‘marathon mortgages’ over a 40-year term.
We asked Mike Harms, specialist medical IFA and mortgage adviser from Medical and General to tell us more.
Medical and General are Medics’ Money approved whole of market mortgage advisers and they have helped doctors nationwide secure the best deal on their mortgages.
It wasn’t so long ago that a 25-year mortgage was the default starting point for first-time buyers. Paying back a mortgage over this time frame would put homeownership out of reach for many.
The average property price in April 2018 was £226,906. Even with a competitive interest rate of 2.4%, monthly repayments would be £1,020 with a 25-year mortgage. In contrast, the monthly outgoing would fall to a more manageable £746 with a 40-year mortgage. It’s easy to see why marathon mortgages may be attractive. But are they always the best option?
The rise of marathon mortgages
Just five years ago, only two-fifths of mortgage policies allowed a consumer to sign up to a 40-year deal. That’s now increased to 55%. In line with this, mortgages with shorter terms have fallen. Those with a maximum term of 25 years account for less than 3% of the market.
Lenders are becoming more flexible with age limits too. In the past, it was expected that your mortgage would be cleared before traditional retirement age. Now, however, it’s possible to secure a mortgage that extends far beyond this. Some lenders will even consider applications from aspiring homeowners that are already retired. Given that the average age of first-time buyers is rising, this gives more people an opportunity to take out a marathon mortgage.
Marathon mortgages aren’t going away. If you’re considering taking one out, you need to weigh up the pros and cons first. In some cases, a marathon mortgage can be the right product, but this isn’t always the case.
The advantages of a marathon mortgage
Your monthly repayments will be lower
As demonstrated above, a longer mortgage will mean your monthly repayments are lower. This is the key reason why many people with marathon mortgages choose them.
House prices have increased significantly over the last couple of decades, whilst real-term wages have stagnated since the financial crisis. As a result, taking out a mortgage over a longer term is the only option some aspiring homeowners have. A marathon mortgage may make monthly repayments from impossible to affordable.
It may give you the ability to purchase a more expensive home
A traditional 25-year mortgage may not allow you to purchase a dream home. But a marathon mortgage may mean you’re able to borrow more.
As part of the mortgage application process, lenders will assess your ability to meet repayments. So, reducing this by spreading the loan out can help. Of course, you’ll be making these repayments for longer and you need to factor this into your decision.
The disadvantages of marathon mortgages
You’ll pay more interest
Over the length of a marathon mortgage, you’ll pay far more interest compared to shorter options. When you look at the figures, it may be enough to tempt you towards a shorter option.
Let’s say you need to borrow £200,000 and secure an interest rate of 3.5%.
- With a 25-year mortgage the total cost would be £300,374
- Choose a 40-year mortgage and the total cost rises to £371,895
As a result, opting for the shorter time frame would save you £71,521. If it’s affordable to pay your mortgage over a shorter period, it’s worth considering for this reason.
You could be paying a mortgage into retirement
Whilst lower repayments now are attractive, you need to look at the bigger picture. If you take out a 40-year mortgage, what age will you be when it’s complete? How would this affect your financial security and plans?
Choosing an initial 40-year mortgage doesn’t mean you have to pay over this period. Making overpayments or reducing the time frame when remortgaging are options. This could provide you with some flexibility. If this is your intention, it’s a good idea to have a long-term plan in mind.
Are you struggling to understand which mortgage option is best for you? Whether you’re a first-time buyer or looking to secure a new deal, it can seem complex. Please get in touch with us to discuss your mortgage needs.
This does not constitute advice and advice should be sought in all instances before acting on it. Medical and General is authorised and regulated by the Financial Conduct Authority.