What I tell every first-time buyer about ‘marathon mortgages’ including the big retirement risk and the £167,000 cost
SOARING house prices has made it more difficult for first-time buyers to get on the property ladder.
But so-called marathon mortgages could be the answer for some aspiring homeowners.
However, these deals have some pitfalls that borrowers need to understand.
Nicholas Mendes, mortgage technical manager at broker John Charcol, has helped hundreds of people buy their dream home.
Here he explains everything you need to know about the latest mortgage trend.
What are marathon mortgages?
The phrase describes mortgages that are paid back over longer periods of time.
It comes as one in four buyers under 30 have a mortgage with a term of 35 years or longer, according to data from credit firm Experian.
Nicholas says: “Historically homebuyers had a mortgage term of 25 years.
“But since the pandemic property prices have gone up.
“And the average term has gone up to around 30 or 35 years – many lenders will even give terms of 40 years.”
A mortgage term isn’t fixed for the duration of the loan and can be changed each time you remortgage.
For example, if you take out the mortgage on a 35 year basis, there’s nothing to stop you moving to a 25-year term if you can afford it when taking out a new deal.
Longer terms are one way lenders can allow borrowers to take on bigger mortgages.
Nicholas adds: “To be able to afford a home, first-time buyers are borrowing more and stretching it over a longer term.”
Longer term mortgages have also become possible because more lenders are willing to lend past the state retirement age.
Nicholas says: “People are working later, so lenders are now more open to people taking out a mortgage at an older age to allow lending later in life.”
What are the drawbacks?
Having a longer mortgage term give buyers the means to borrow more and buy a pricier home.
On the surface, this sounds like a win for first-time buyers struggling to afford property prices.
However, borrowing over a longer term means that you will pay more for the debt.
Nicholas says: “The longer the term the more interest you pay
“This could be tens of thousands of pounds more, depending on the amount borrowed.”
For example, someone borrowing £300,000 over 25 years at a rate of 4.98% would pay a total of £225,320 in interest.
Whereas borrowing the same £300,000 over 40 years at a rate of 4.98% would mean you’d repay whopping £392,887.
That’s £167,567 more in interest just by stretching the same borrowing over an extra 15 years.
Is a marathon mortgage right for me?
Taking out a longer term mortgage could be the difference between buying a home and not being able to.
Younger borrowers under 30 could particularly find the stretch is a useful way of getting on the ladder.
These buyers will in theory have plenty of time to reduce their mortgage term if their earnings increase or they build up more equity in their property.
Nicholas says: “Marathon mortgages aren’t available to everyone
“Most people are under 30 and earlier in their career.
” But if salaries don’t increase it’s a risk.
“If your income hasn’t improved or you plan to retire, which could mean a lower income, this could mean having to sell the home and downsize so it’s affordable.”
But anyone looking to take out a new mortgage should first have an idea of their budget and how much they can afford to repay each month.
Nicholas says: “You should go for the shortest possible term.
“Even if it’s just going for 34 years instead of 35.”
The mortgage expert said that having a longer mortgage term could cause problems later on.
He adds: “You don’t know what your circumstances will be further down the line.
“You don’t want to be waiting to retire because you have a mortgage that’s still hanging over you.
“It could potentially mean having to work longer later in life when actually you want to be taking your foot off the gas.”
Another potential downfall of a marathon mortgage is that it will take you longer to build up equity in your property because more of you repayments will be swallowed by interest.
Nicholas explains: “With a longer term mortgage equity is built up much slower.
“This means that when it comes to home moving – you might not have as much as cash to use as a deposit for your next property that you might expect.”
How to get the best deal on your mortgage
Looking for a mortgage is complicated and the easiest way to search the market is by buying using a good independent mortgage broker.
The larger your deposit as a percentage of the property price, the more favourable rate you will be able to get from lenders.
You will also be able to unlock better rates if you have a good credit score and there are a number of steps you can take to help improve your rating.
Don’t wait until the very end of your mortgage term to look for a new deal.
You can secure a mortgage deal a good six months before a deal ends and still make a fresh application if a better rate becomes available before you lock in.
Some brokers charge for advice, so make sure you are aware of all costs.
You’ll should also factor in fees for the mortgage, as well as legal costs.
A mortgage calculator can give an indication of how much you could borrow.
We have spoken to a pair of first-time buyers who got their £466,000 home with a DIY help to buy scheme.