image source, Nicola Webb
- Author, Lora Jones
- Role, Business Reporter, BBC News
Young homebuyers face significant challenges when it comes to getting on the property ladder and staying there.
Nicola Webb, a 34-year-old nurse, felt she had no choice but to opt for an extremely long-term mortgage when buying her first home last year.
It’s supposed to end at 68, but she says spreading out the repayments is “the only way I can reasonably pay my mortgage as a single homeowner.”
“I don’t know of any lower mortgage rates, so I’ll just accept what it is.”
Despite managing to save a sizable deposit on her £147,000 two-bedroom flat in Gloucestershire, Nicola’s five-year fixed-rate mortgage costs £598 a month – around a third of her monthly wages after taxes and student loan deductions.
Once her student loan is paid off — or eventually written off — she hopes to shorten the 35-year term of her mortgage or use the extra disposable income to overpay.
She says she is grateful that she was able to start looking for an apartment at all. Although mortgage costs make up a large portion of her income, she believes it is still cheaper than rent in her area.
“I haven’t had any luck with the rent at all… and for me it’s all about keeping it as cheap as possible.”
Current figures suggest that Nicola’s situation is becoming more common.
Data from the Bank of England shows that hundreds of thousands of homeowners have taken out mortgages in the last three years that they will continue to pay off into retirement.
While longer mortgage terms may make repayments more affordable in the here and now, homeowners will pay off more interest overall.
Some industry representatives also expressed concerns that buyers may no longer be able to afford a mortgage in retirement and will raid their retirement savings to pay off their home loan, leaving them with less to live on in old age.
However, some consider a longer term of 35 or 40 years to be a temporary solution as they wait to see whether mortgage rates fall back from their relative highs.
Martin Tapper, an Essex-based mortgage broker, told the BBC that most of the first-time buyers he has advised this year have opted for a 40-year term.
“A young family can avoid the exorbitant rental costs and buy a home whose mortgage costs are far cheaper in the long term,” he suggests.
He adds that he would only steer a client toward these longer terms if they were “right.” He always recommends returning to a shorter term later if possible, for example if a client’s wages have increased or if they are moving home.
And he says it’s important to have insurance to prevent payments from becoming difficult if a person’s health worsens or they lose their job.
For 30-year-old Shane Lees, weighing the pros and cons of an extremely long mortgage was a serious undertaking.
He and his partner are remortgaging so they can buy a three-bedroom house in West Sussex and start a family there.
After speaking to six or seven mortgage brokers, they settled on a 35-year mortgage term, hoping to drop to 25 years at the end of a two-year fixed contract.
Shane says that if they wanted to buy a property at the top end of their budget over a 25-year period it would be “affordable but extremely inconvenient”.
He thinks a longer mortgage term of around 5.5% is the “most sensible option at the moment” if he and his partner manage to find a property worth around £370,000.
The pressures facing younger homeowners like Shane are quite clear, with the proportion of mortgages held beyond state pension age rising sharply.
The number of homeowners under 30 taking out such mortgages more than doubled in the two-year period, while the number under 40 increased by 30%.
But Sarah Coles, head of personal finance at Hargreaves Lansdown, says people shouldn’t rely on interest rates being lower if they shorten the term later.
“Economists are constantly changing their expectations about when the Bank of England will cut interest rates.
“In January some of them were already predicting cuts for March, and now we are expecting them this summer instead. Even then, the cuts aren’t expected to happen particularly quickly, so anyone holding their breath about much lower interest rates has quite a lot to worry about.” waiting on their hands.
She suggests that those with a 35- or 40-year mortgage need not only a plan for repayment, but also a Plan B for life’s “unexpected twists and turns.”
For example, if you’re carrying your mortgage into retirement and plan to sell and downsize to pay off the debt, you need to think about what to do if you change your mind and want to stay in your home, she says .
“It may be just what people need to make their mortgage more affordable, but they need to be aware of the wider implications.”
It may be a gamble for homeowners like Shane, but for him it’s a risk worth taking now.
Additional reporting by Bernadette McCague.
Ways to make your mortgage more affordable
- Make overpayments. If you still have some time to get a great fixed price deal, you may be able to pay more now to save later.
- Switch to an interest-free mortgage. This will keep your monthly payments affordable, even if you don’t have to pay off the debt you incurred when you purchased your home.
- Extend the term of your mortgage. The typical mortgage term is 25 years, but terms of 30 and even 40 years are now possible.