Why long-term mortgages could span the generations
Many people say in life that 40 is the new 20. But in the world of mortgages, it seems that 35 is the new 25.
This is because figures show that the traditional 25-term mortgage, for so long the typical product, is gradually being replaced by mortgages whose terms last a whole decade longer. With one in seven buyers now signing up to 35-year deals compared to just 2.7% in 2005.
This has caused concern with many people, who are worried that such deals. Combined with first-time buyers getting onto the property ladder later in life, will result in an increasing number of home-owners still paying off their mortgages after they retire.
Look behind the figures, however, and there is a different picture. This is why 35-year mortgages have been fairly common and popular with our buyers for a while.
First-time buyers are having to go long because of stricter affordability criteria imposed by lenders. But many can often afford to overpay their mortgage if they want to.
This is something we highly recommend. Along with switching to a shorter term deal when they are able to afford the associated higher monthly repayments.
Both approaches will enable them to avoid the prospect of extending their working life. Or even using their pension to pay off their mortgage, let alone avoid paying the extra interest charges associated with a super-long deal.
Yet even if they don’t manage this, getting a long-term mortgage is still a much better option than renting. At the end of the process, you emerge with a tangible asset. I also include in this interest-only mortgages. These were once extremely widespread but have such a bad name that they are much harder to come by in relative terms.
Personally, I would like to see more of them. I accept that they are not suitable for short-term home ownership because of the prospect of negative equity. But in the long-term, the trend for property in the UK is to increase in value. So even if you never pay off the loan, you will experience capital appreciation – something you don’t get with renting.
The drawback with this is that in order to settle the bill, you would have to sell your home. But here is an area where, if I were to design a mortgage product, I would concentrate.
I would look to introduce intergenerational mortgages which, similar to long-term mortgage deals available in Sweden, involve people buying their homes and then passing on the mortgage to their children.
It means that what starts out as a debt for you will, over time through capital appreciation, result in an asset for your children.
Leave it long enough and what started out as a £200,000 home could well one day be worth £1,000,000. At which point the children have numerous options. They can decide to sell the home, pay back the original loan and share the proceeds, or one of them can take it on themselves.
It may sound far removed from the current situation, but such long-term mortgages are available elsewhere in the world. Families have a growing hand in the house-buying journey anyway, so why not?
Plus, many of the mortgage models we now take for granted would also have been viewed as radical in the days when your typical mortgage lasted for 25 years. The widespread introduction of intergenerational mortgages may just be a matter of time.