HSBC now offers a 40-year mortgage term. The decision comes amidst a surge in demand from borrowers seeking ways to alleviate the burden of monthly mortgage payments.
This extended mortgage term first became accessible through mortgage brokers on August 30, 2023 and was followed by direct applications by customers on September 13. Aside from residential mortgages, it is also available to buy-to-let mortgages, regardless of whether borrowers choose to engage a mortgage broker, or arrange the mortgage directly through the bank.
Borrowers also have the flexibility to consider 40-year terms when seeking additional borrowing, either as a standalone loan or in conjunction with a remortgage. However, HSBC's current maximum term of 25 years will still apply to residential applications involving interest-only payments.
HSBC now joins major lenders such as Halifax, Barclays, Santander, NatWest, TSB and Nationwide that have stretched their maximum mortgage term.
What does this mean for first-time borrowers (FTBs)?
Average mortgage rates for two-year loans have surged to their highest levels in recent years. In such a climate, longer mortgage terms provide borrowers with a means to mitigate the impact of rising interest rates, offering them greater financial stability and affordability over time.
This extension allows first-time borrowers to spread their repayment obligations over a more extended period, resulting in reduced monthly expenses. It can free up more of their income and help them weather financial challenges without the pressure of high mortgage payments.
In addition, homeownership is made more accessible for FTBs who may have lower incomes. Thus, a 40-year mortgage can be a practical way to enter homeownership without overextending their finances.
However, a longer mortgage term entails higher overall costs, as borrowers continue to accrue interest on the loan for an extended duration. Over time, this can result in substantially higher interest expenses compared to shorter-term mortgages.
In addition, the rate at which homeowners build equity in their property will be slower. It can take longer to own a significant portion of the home, making it less attractive for those who aim to build equity and wealth through property ownership.
Extending a mortgage into retirement can also significantly impact one's financial future. The longer the mortgage commitment extends into retirement, the greater the potential risk to one's financial stability and financial vulnerability in later years.
Once they transition from earning employment income to receiving their pensions and savings, servicing a mortgage may leave retirees with fewer resources to enjoy a comfortable retirement.
Is the 40-year mortgage term now a standard?
The mortgage term, typically set at 25 years, has been gradually extending due to the turmoil in the housing finance market, characterised by soaring costs and uncertainty. However, even before the pandemic, many UK borrowers have started taking advantage of the so-called "marathon mortgages" or "extended mortgages".
The rapid increase in interest rates by the Bank of England (BoE) has also fueled the trend as more borrowers continue to explore options to mitigate the impact of rising monthly obligations. In March 2023, the number of mortgages longer than 35 years that were taken out by FTBs reached 19%, up from 9% in December 2021, according to UK Finance.
After the BoE announced its 14th consecutive hike in the cost of borrowing to 5.25% in August 2023, interest rates are expected to remain on the upswing as the bank forecasts it will remain high for at least two years. More borrowers may likely shift to longer mortgage terms as a way to counterbalance the increased cost of borrowing.
Finally, residential rental prices surged to 5.3% in the 12 months to July 2023 from 5.2% a year prior, with London seeing a 5.5% rise. Economists blame it on rising interest rates that have impacted landlords' mortgages, most of which are buy-to-let loans. As renters are squeezed out of their rents, the desirability of seeking a mortgage with lower monthly payments becomes more appealing, especially for FTBs.
The desirability of marathon mortgages will continue as long as lenders can profit from higher rates on these longer-term loans. In fact, UK lender Perenna was given the green light by regulators in 2022 to offer a 50-year fixed rate mortgage, which is the longest so far in the UK market today (although it has yet to release details of the mortgage as of this writing).
Japan broke records, however, when it introduced the 100-year term back in the 1990s when there were very few who could afford the standard mortgage term. This also encouraged intergenerational lending so that parents or grandparents can provide financial assistance to their children or grandchildren to make homeownership more accessible.
How much will my monthly payments be for a 40-year mortgage term?
Suppose the mortgage is valued at £300,000 with a 5.5% interest over 25 years (excluding mortgage deposit, taxes, home insurance, mortgage insurance, and other costs), the monthly repayments will be £1,842.26. The borrower will then be paying a total of £552,678.74 over the lifespan of the mortgage.
Now, suppose the same mortgage value and interest rate are applied but the repayment is spread 40 years, the monthly repayments will be lower at £1,547.31. That's a difference of £295 when compared to a 25-year term. However, the borrower would pay £742,709.21 over the lifespan of the mortgage: £190,030 more than on a 25-year term.
Is a 40-year mortgage term good for me?
Whether a 40-year mortgage term is good for you depends on your specific financial circumstances, goals, and preferences. Here are some factors to consider when deciding on the term of your mortgage:
1. Monthly payment affordability. A longer mortgage term typically results in lower monthly payments compared to shorter terms. If you need lower monthly payments to make homeownership more affordable or fit within your budget, a longer term can be beneficial.
2. Financial goals. Consider your long-term financial goals. Are you comfortable with the idea of paying off your mortgage over an extended period, potentially into your retirement years? Or do you prefer to pay off your mortgage sooner to free up funds for other investments or goals so you won't be in debt much longer?
3. Total interest costs. Keep in mind that a longer mortgage term means you'll pay more in interest over the life of the loan. If minimising interest costs is a priority, a shorter-term mortgage may be more suitable.
4. Retirement planning. Assess how your mortgage term choice aligns with your retirement plans. Having a mortgage-free home in retirement can provide financial security, but it also depends on your expected retirement age and income sources. In a survey of 4,000 UK adults by insurance firm LV=, 63% of those who retired had an outstanding mortgage debt that they had to pay using their pension.
5. Market conditions. Consider the prevailing interest rates and housing market conditions. Lower interest rates might make shorter-term mortgages more affordable, while higher rates could make longer terms more attractive for lower monthly payments.
6. Flexibility. Think about your financial flexibility. A longer mortgage term can offer more financial breathing room in the short term, but it may restrict your ability to pay off the loan early without penalties.
7. Overall financial picture. Examine your overall financial situation, including your income, debts, and savings. A mortgage term should always align with your broader financial strategy.
8. Future plans. Consider how long you plan to stay in the home. If you anticipate moving or selling the property within a few years, a longer mortgage term may not be necessary.
What should a first-time buyer do next?
Estimate your monthly payments and the total amount you'll pay over the life of the loan using an online mortgage calculator to make a well-informed decision that aligns with your homeownership goals and financial stability. This will help you evaluate the trade-offs between lower monthly payments and higher overall interest costs in a longer mortgage term.
More importantly, get in touch with a mortgage adviser who can present various mortgage options while taking into account factors such as interest rates, loan terms, and total interest costs. The Mortgage Hut has a team of mortgage professionals who can guide you in exploring different lenders and their offerings, including any unique terms or benefits they may provide.