First-time buyers and movers are increasingly opting for so-called ‘marathon mortgages’ in an effort to bridge the gap between rising living costs and still-high asking prices, with lenders now offering terms of as long as 40 years on some deals.
According to Experian’s latest data, 25% of new homeowners aged 29 and under between January and March this year had opted for a repayment term of at least 35 years. This compares with the historical typical level of about 10%, which Experian recorded in January 2020.
With rising interest rates making it harder for some prospective buyers to afford a 20 or 25 year deal, lenders such as HSBC are introducing ‘marathon’ 40-year mortgages, hoping to attract customers who might struggle to meet the monthly payments for a shorter offer, and who are willing to be tied down to an extra-long deal.
While 35 or even 40 year deals will undoubtedly help many people get onto the property ladder who previously couldn’t, there are several pros and cons that customers ought to be aware of before choosing a marathon mortgage.
What are the pros and cons of marathon mortgages?
Lower monthly payments
Long-term mortgages typically have lower monthly payments compared to shorter-term loans because the repayment period is extended. This can make homeownership more affordable for some borrowers.
Stability and predictability
Long-term mortgages tend to offer more stability and predictability in your monthly housing costs. This can be beneficial for budgeting purposes, as you’ll know exactly how much you need to allocate for your mortgage each month.
Easier budgeting for other expenses
With lower monthly payments, it is then easier to budget for other housing expenses and to put money away in savings, providing further financial stability.
Increased buying power
A longer-term mortgage can increase your borrowing capacity, allowing you to afford a more expensive home or potentially enter the housing market with a lower down payment.
Cash flow flexibility
Lower monthly mortgage payments can free up cash for other financial goals, such as investments or saving for retirement.
Higher total interest costs
While monthly payments are lower, the total interest paid over the life of long-term or marathon mortgages is significantly higher than that of shorter-term mortgages. This means you will pay more for your home in the long run.
Slower equity build-up
With lower monthly payments, a significant portion of your initial payments goes toward interest rather than principal. This means that your equity in the home builds up more slowly compared to a shorter-term mortgage.
Committing to a mortgage for 30 or 40 years is a significant, long-term financial obligation. Life circumstances may change, and you may find it challenging to predict your future financial situation accurately.
Limited refinancing options
Extending your mortgage term for an extended period can limit your ability to refinance or take advantage of lower interest rates in the future.
Seek professional guidance
When it comes to securing a mortgage deal, the most important thing is finding what the best option is for your specific circumstances.
Whatever the right type of mortgage for your circumstances, shopping around and speaking to a good mortgage broker is a wise move. The experienced mortgage advisers at George Square Financial Management would be happy to chat through your options and help you secure the right mortgage deal for you.