First-time buyers are now, on average, taking out mortgages with terms of 27-30 years – but this won't help the overall market
Patrick Collinson The Guardian, Saturday 14 September 2013
How we scoffed in the late 1980s when Japanese salarymen, so desperate to quit their tiny apartments and buy a home during the bubble years, signed up for 100-year mortgages. How else could anyone afford the otherwise colossal monthly payments?
But who's laughing now? In yet more evidence of a British housing market bubble it has emerged that the traditional 25-year mortgage is being consigned to history. Figures from LSL, the UK's second biggest estate agency chain, with brands such as Your Move and Reeds Rains, suggest first-time buyers are now, on average, taking out mortgages with terms of 27-30 years.
LSL keeps a tally of the thousands of first-time buyers it deals with each month. The typical mortgage first-timers take out has climbed by 15% since 2011, and although the duration varies it has never been lower than 27 years and has been as high as 30 years.
It's hardly rocket science why hard-pressed borrowers are opting for longer terms. Borrow £120,000 at 4% and the monthly repayment is £633 if you opt for 25 years. Stretch it to 30 years and it drops to £573. Push it all the way out to 40 years and the cost is just £502 a month. But those doing so have to close their eyes to the fact that the total amount of interest repaid soars from £70,021 for a 25-year loan to £86,243 over 30 years and a massive £120,733 over 40 years. And these figures probably underestimate the real cost, as many first-timers without a big deposit won't qualify for a 4% deal.
Stretched mortgage terms are yet another indicator that we're entering a bubble, even before Help to Buy (Part Two) starting in January pumps the market up further. They were a sorry feature of the Irish boom, where 35-year terms became commonplace.
HSBC sets a limit of 30 years, while Santander stops at 35. Halifax and Nationwide let you stretch to 40. No doubt there are "specialist" lenders out there willing to go even further.
Last year, the Financial Services Authority (now the Financial Conduct Authority) dropped its proposed requirement for affordability to be assessed on a maximum 25-year term after intense lobbying by the lenders. They argued that as house prices are so expensive, mortgage duration has to be lengthened to allow younger people to buy.
The FSA was wrong to cave in. House prices are largely a function of how much money lenders are willing to lend. If you fiddle the affordability test so that a jumbo loan becomes "affordable" by lengthening the term, you are not making a purchase more achievable, you are simply hosing more money on to a market that has pitifully constrained supply, so prices jack up even further. This doesn't help people trying to get on the fabled property ladder – it just makes the situation worse. And for some first-time buyers (average age now in their 30s) it will leave them repaying loans well into retirement.
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