A mortgage has always been a long term commitment, but an increasing number of homebuyers are still repaying their home loans in their 70s.
At Continuum we are looking at why, and whether there are alternatives.
Traditionally mortgages have lasted for around 25 years, but demand for longer-term deals has grown substantially over recent years, as house prices have headed steadily upwards, making repaying over a mere quarter of a century increasingly difficult.
Taking your mortgage over a longer term allows you to reduce your monthly outgoings and borrow more. Lenders are increasingly catering to borrowers who need a longer mortgage to be able to afford to buy the property they want.
The latest data suggests that as many as 6 in 10 mortgage deals now come with a standard maximum term of 40 years.
But of course, with the need to save more to get on the mortgage ladder at all, the age when buyers take out their first mortgage is actually getting later. A combination of later starts and longer repayment times means that many borrowers will not have paid off their mortgages until they are in their seventies or even their eighties.
With people working and living longer we are seeing more demand from clients to take out their mortgage on as long a term as possible.
The advantages of a long-term mortgage
There are several reasons for this change in mortgage borrowing.
The first is obvious enough. Despite the fact that over the longer term they will pay more interest, first-time buyers see that a long-term approach allows them to keep their mortgage payments lower for longer. This is especially important if they are still in the early years of their careers, when their earning potential has not yet peaked.
But there is another reason. Rather than opting for the small traditional starter homes popular in the past as the first rung on the property ladder, an increasing number of borrowers are setting their sights on larger, more expensive and frequently detached homes.
Moving straight into a home for life may save the cost and stress of making several moves.
Of course, there is another reason. The prices of all homes mean that many people can only afford a mortgage at all by stretching it into the far distant future.
The disadvantage is that it means having a major financial commitment in your retirement, at a time when most people would rather be enjoying their pension themselves rather than handing it over to their lender.
A longer term also means paying much more in interest overall.
An extended mortgage that runs into your retirement means you need to consider your options and how you would manage if your financial arrangements do not go to plan.
In extreme cases, it may mean that you need to delay your retirement for several more years until your mortgage is paid off.
So, what are the answers?
In most cases, there can be alternatives to a long-term mortgage commitment. You may be able to reduce your outgoing by switching to an interest-only mortgage. This will avoid the cost of repaying your loan, and home loans intended to be paid off after your death by the sale of your home now exist.
You could also consider the alternative approach – switching to the most cost-effective mortgage, which could save you money each month from the outset, letting you overpay to shorten your overall repayment period.
You could also start a savings plan to provide a lump sum which would pay off the outstanding sum on your mortgage.
To understand the solution that might work best for you, you will need professional advice, and a look not just at your mortgage, but at all your financial arrangements to understand what might be possible for you.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable Protection products or investment strategy, you should seek independent financial advice before embarking on any course of action
Your home may be repossessed if you do not keep up repayments on your mortgage.
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