2020 proved to be a whirlwind year for house prices. Despite the economic slowdown caused by the coronavirus pandemic, the average UK house price rose £13,316, with the Times reporting that it reached an all-time high of £230,920.
Scottish house prices also followed this trend. According to figures published in the Scotsman, Edinburgh houses saw a 6% rise to an average of £274,246, whilst Glasgow rose 2.1% to £193,621. Ayr saw the largest growth in prices in Scotland, rising 15.5% to £177,984.
With house prices on the rise, first-time buyers are needing larger mortgages than previous generations. As a result, many are turning to longer mortgages to reduce their monthly payments, dubbed “marathon” mortgages.
The rise of the marathon mortgage
A “marathon mortgage” – so-called because they run and run – is the term being given to the rise of home loans that last for more than the previously typical 25 years.
In the last decade, marathon mortgages have become a staple offering for lenders, with most mortgage products now allowing borrowers to take out a loan over 40 years.
In 2019, Moneyfacts data published in FT Adviser showed that 2,744 mortgage products offered a 40-year mortgage, accounting for 55% of the whole residential market.
Are marathon mortgages good value for buyers?
The main benefit of a marathon mortgage is that it could allow you to borrow the amount you need to buy the property you want.
When taking out a new mortgage, applicants must demonstrate that the monthly mortgage costs are affordable to them, both now and in the future. So, as Darren Cook, finance expert at Moneyfacts explains: “By extending their mortgage term, borrowers can reduce their monthly repayments and therefore are more likely to meet strict affordability requirements.”
An example from FT Adviser showed that a £200,000 repayment mortgage at a rate of 2.5% over 25 years would have monthly repayments of £897.23. Meanwhile, the same mortgage over a 40-year term would reduce the repayments to just £659.56.
Extending the term reduces your monthly repayments by more than £235, increasing your chances that you’ll pass a lender’s affordability tests.
However, whilst taking out a 40-year mortgage means your repayments are cheaper in the short term, you’ll pay more interest in total. This makes it considerably more expensive than a shorter mortgage overall.
Using the same example above, the total interest over 25 years would be £69,169. Alongside your repayments, the total you’d pay back would be £269,169.
However, over 40 years, you’d pay back £116,588 in total interest. Over the term, you’d pay £316,588 overall. Therefore, extending your mortgage term by 15 years would cost you more than £47,000 extra overall.
Marathon mortgages increasingly popular with first-time buyers
Marathon mortgages have become very popular for first-time buyers looking to get a foot on the property ladder.
A decade ago, just 45% of first-time buyers opted for a mortgage term of more than 25 years. However, according to Nationwide Building Society, 70% of first-time buyers took out a mortgage of over 25 years or more in 2020, the Times reported.
When considered in the context of record-high house prices and stagnating incomes, this is largely unsurprising; an average 20% deposit is now 104% of the average pre-tax income of a full-time employee.
The popularity of marathon mortgages for first-time buyers is also, according to some experts, partly because of the way millennials view money and payments in general.
“They don’t look at house prices or indeed a mortgage in the way that their parents’ generation did,” said buying agent, Henry Pryor. “They approach buying a house in the same way as buying a car. It’s about ‘can I afford the monthly repayments and what does that allow me to buy?’”
Is a marathon mortgage right for you?
Depending on your personal circumstances, a marathon mortgage could provide you with a way to get on the property ladder. Reducing your monthly repayments makes the mortgage more affordable to you and increases your chances of getting the home loan you need.
However, the effect of the interest you’ll pay over four decades does make taking a 40-year mortgage expensive in the long-term, and so it may not be suitable for you. You should always speak to an independent mortgage broker before making any decisions.
Get in touch
As mortgage experts, we can help you make the right decisions when it comes to getting a mortgage.
We will help you decide whether a marathon mortgage might be right for you in your circumstances and can find the right deal and lender for you.
For more information, please email [email protected] or call 0131 339 2281.
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