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Borrowers Opt for Longer Term Loans

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More homeowners looking to move or remortgage their existing properties have opted to pay a lot more interest over the loan period, by choosing a longer term mortgage.

171,000 new mortgages were recorded in this year’s second quarter at the end of June and one in five is said to have been taken out for at least thirty years. The Council of Mortgage Lenders reported that one in every five to six home loans were over a thirty year term in this year’s first quarter leading up to the end of March.

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The figures revealed  similar data for first-time buyers who took out mortgages. In fact they were somewhat higher proportionally. Almost a third of them had loans in excess of a thirty year term in the second quarter compared to about a quarter in the first three months of the year.

Thirty years old is the average age of a first-time buyer across the UK, but unsurprisingly it rises to approximately thirty five for more sought after areas such as London where the prices are so much higher. 

This is something to be mindful of when choosing the mortgage term as the lenders set an age limit and majority of them have that at seventy five years old.

David Hollingworth, Head of Communications at London & Country Mortgages wonders if people  will “ever be free of debt” and believes some may look at their loan like “a life sentence”.

A decade ago, less than one in twenty chose a mortgage term to be thirty years or above. Now it seems increasingly obvious that people feel more comfortable to sign up for lower monthly instalments for the longer time, rather than higher amounts and keep the total cost of the loan quite a bit lower.

Therefore, the reasons appear to be more obligatory as opposed to voluntarily, because the monthly premiums become more affordable.

The CML are convinced that this has evolved from rising house prices plus very well documented  interest rate increases being anticipated in the near future.

The trade association for the residential mortgage lending industry also believe that the Mortgage Market Review’s new stringent testing criteria introduced last April has also had a major effect on the lending market.

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Prudential Regulation Authority chief executive and Bank of England Deputy Governor Andrew Bailey advises borrowers to be more cautious about extending the length of their loans.

Mr Bailey commented: “We have to watch this very carefully, because if mortgages extend beyond the point at which people’s income falls off, then we have a long term problem.”

However, Your Mortgage Decisions director Dominik Lipnick had a different take on it. The industry expert has a more open outlook. He analyses the situation by explaining that the mortgage market “needs to reflect the fact that people are working for longer and living longer”. 

Mr Lipnick added : “Without a doubt, 30 or 35 year mortgages are becoming the new 20 and 25 year terms. People will borrow for longer as house prices continue to rocket.”

But even though a five per cent rate can work out an extra thousand pounds for every two thousand pounds initially borrowed if extended by fifteen years, new research published by Halifax tells us how much cheaper it still is to buy our home rather than rent it.

Simon McCulloch, Director of Insurance at comparethemarket.com voiced his concerns over “desperation to climb on the housing ladder”.  Mr McCulloch said: “If people do not have good pension arrangements, that is a risk.”

But Ray Boulger, ‘guru of the mortgage industry’ sees it from another angle. The mortgage broker asks “Is there anything inherently wrong with 30 year mortgages?” 

Mr Boulger proceeds by answering his own rhetorical question by saying: “No, it depends on individual circumstances. The idea that a mortgage has to last 25 years is outmoded. Most people will be better off with a long term loan, if the only alternative is renting.”

About the author

David Griffin David Griffin trained as a graphic designer and now helps PaydayLoan123 with social media. He is a born and bred Londoner who has recently moved out of the capital and is probably missing it a little too much. He enjoys fishing, playing golf and working out at the gym, when he feels energetic enough!

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