One in four first time buyers are taking out a mortgage that will last 35 years or more. Claire Miller, writing for the The Mirror, reports this week on a phenomenon, which could see borrowers in mortgage debt all their working lives and possibly well into their 70s.
As the The Mirror article points out, ten years on from the subprime mortgage crisis and the consequent tightening of borrowing regulations, 95% mortgages or above are now rare. And so, faced with rising property prices, first time buyers are seeing 35 year mortgages as an attractive leg up onto the property ladder.
Longer Mortgages on the Rise
Earlier in the summer the Bank of England disclosed that during the first three months of this year, 15.75% of all new mortgages were taken out for 35 years or more. And whilst lower monthly payments might look attractive – either to make the mortgage affordable or to create a little bit of slack in the budget, when you get down to the nitty gritty number crunching, the bottom line demands some serious consideration.
Quoted in a recent article in The Guardian, a Halifax report shows how a mortgage of £180,000 on a £200,000 home would mean monthly payments of £809 over 25 years but a much more affordable £596 each month if the mortgage term was 35 years. But of course, the catch is that the total interest rate payments over the longer term mortgage would cost a borrower probably tens of thousands of pounds more.
Find the Balance
So it’s all a question of finding the best balance between paying a mortgage back as quickly as possible in order to pay less interest versus the affordability of the monthly repayments.
And that’s not as easy as it sounds. At least its not easy if you don’t have an in-depth understanding of your finances, a 3D picture of exactly how much money is coming in each month and where every penny is committed or spent. You might know where I am going now!
A Financial Mirror
Castlight’s Affordability Passport® has been developed to do exactly that. Our AP customers securely share their transactional data with us and in minutes, our digital platform strips it all down into 155 categories of discretionary and non-discretionary spending. Its a bit like a 360 degree mirror, revealing areas you’ve never properly seen before. The Affordability Passport® report for instance may reveal that you spend £100 a month on take aways for the family, £100 on a gym and sports club memberships, £100 on travel to and from work and another £50 on lunches at work. You maybe hadn’t realised it was quite stacking up like that? So – ditch the pizza and curry, stop the gym you never use, car pool to work and take a sandwich. And yes – there’s the £300 which could mean the difference between taking out a 25 year or 35 year mortgage. You may still decide you can’t give up gym or pizza or you may decide to go for the 35 year mortgage, make some economies and use overpayment facilities to get it paid off more quickly.
Whatever you do with your Affordability Passport® report, the information is yours and it puts you firmly in the driving seat for whatever journey you choose to take.