Regulator issues warning about 35-year mortgages
A leading financial regulator has issued a warning about the increasing trend of banks offering longer term mortgages, claiming it could ‘store up problems for the future’.
Sam Woods, head of the Bank's Prudential Regulation Authority (PRA), has suggested that lenders offering 30- or 35-year mortgages are doing so in order to satisfy affordability rules, despite the fact that they could cause issues for borrowers later on. Keep reading to find out more.
More borrowers could end up paying mortgages from retirement income
Since strict new affordability rules came into force, many banks and building societies have been offering 30- or 35-year mortgages to borrowers in order to reduce the initial payments. Longer term deals have made buying a home more affordable and have helped consumers to reduce the amount they pay to their mortgage.
However, the Bank of England has now warned that this practice could ‘store up problems for the future’. Sam Woods, the PRA chief, has cited the move towards longer-term mortgages as an example of how the regulator thought lenders were playing around the edges of the rules.
He says: “By way of example, I would highlight a recent trend in increasing loan terms: where 25 years might once have been the normal maximum term for a mortgage, now 35 years or even longer seems to be increasingly common.”
One problem highlighted by Mr Woods was that more borrowers would end up paying their mortgage into their retirement, when their income might be reduced.
He adds: “That should not be a problem if lenders can be confident about the availability of such retirement income, or about the scope for the borrower to downsize and use the sale proceeds to pay off the balance of the loan. But if lenders become too narrowly pre-occupied with the profile of the loan in the first five years (in line with MMR affordability rules), this could store up a problem for the future.”
Longer term mortgages can mean paying significantly more interest
Another issue highlighted by the PRA chief was that increasing the mortgage term can significantly increase the total amount of interest paid over the life of the loan.
Calculations by Telegraph Money have revealed just how much additional interest a borrower can expect to pay by taking a mortgage over a longer term.
Assuming a £100,000 mortgage with an upfront charge of £500 and interest rates averaging 4.5% over the full term, a borrower taking a 30 year mortgage rather than a 25 year mortgage would pay £15,650 more in interest over the lifetime of the loan.
If you took the same mortgage over 35 years you would end up paying £32,000 more interest in total than if you took a standard 25 year term.
On a larger mortgage the difference is even more pronounced. Assuming a loan of £250,000, an upfront charge of £500 and interest rates averaging 4.5% over the full term, a borrower would pay a whopping £39,150 more in interest by taking a 30 year rather than a 25 year deal.
A 35 year deal would result in an eye-watering additional £80,050 interest when compared to a traditional 25 year mortgage.