Record demand for 35-year mortgages as first-time buyers face soaring rates

first time buyers mortgage rates
first time buyers mortgage rates

A record share of first-time buyers are taking out mortgages with terms of 35 years or more as soaring costs force more Britons to sign up to a lifetime of debt.

UK Finance data shows 19pc of all loans taken out by first-time buyers in March were for terms of 35 years or longer.

This is the highest proportion since records began in 2005 and more than double the 9pc rate seen in December 2021, when the Bank of England started raising interest rates from a low of 0.1pc.

The average age of a first-time buyer is now 32, according to Halifax, suggesting that many people are borrowing until the end of their working life or even into retirement.

While many first-time buyers will refinance onto shorter term loans as their pay rises and deals expire, figures show a rising number of existing homeowners are also turning to longer-term deals to help them cope with soaring rates.

UK Finance data also shows 8pc of home movers are taking out mortgages for terms of 35 years or more compared with 4pc in December 2021.

This suggests a growing number of homeowners are taking out mortgages that will stretch into their seventies.

Buyers and homeowners who take on mortgages of 35 years or longer will rack up thousands of pounds more in interest payments over the lifetime of the deal compared to those on shorter duration deals. However, monthly repayments will be lower, which helps people to cope with higher interest rates.

In an analysis to be published later this week, UK Finance, which represents the banking industry, will say: “In order to lower monthly payments and, thereby, improve their affordability calculations, we have seen customers increasingly take out mortgages over longer terms, an option still permitted by most lenders and also within the [City watchdog’s] responsible lending rules.”

Mortgage costs have risen sharply after the Bank raised rates a dozen times to keep a lid on inflation, which still stands at 8.7pc.

Housing costs are likely to climb further in the months ahead after a surprise increase in so-called core inflation in April, which strips out the volatile movements in energy and food prices. The inflation shock prompted a lurch upwards in gilt yields and swap rates, which banks use to price their fixed-rate mortgage deals.

More than half of first-time buyers now take out a mortgage of more than 30 years, UK Finance shows. However, this level has plateaued in recent months.

While extending mortgage terms has been an effective strategy for people to get on the housing ladder, UK Finance will say that this option is “reaching its limit”.

It’s analysis will say: “Whilst this has been a long-term trend seen since 2010, the growth in borrowing over a longer term accelerated rapidly through 2022. As 2023 began we have seen the growth in longer term borrowing level off. Although tentative at this stage, this may signal that the extent to which this option can be used to stretch affordability and meet underwriting requirements is reaching its limit.”

The average five-year fixed rate mortgage for a buyer with a 25pc deposit was 4.2pc in April but economists believe this will creep back up to 5pc in the next few weeks.

For a buyer taking out a typical £200,000 loan, a 0.8 percentage point increase in mortgage rates would cost an extra £1,600 per year in interest. Over the course of a five-year fix, that equates to an extra £8,000.

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