The Bank of England raised its base rate again to 4.5% in May 2023, pushing borrowing costs to the highest level in nearly 15 years. More than 6 million UK households will see an increase in their mortgage payments by the end of 2025, with more than 4 million in 2023.
For an average household this would mean an increase in monthly payments of £750 to £1,000 – or around 17% of average pre-tax income, compared with 12% in June 2022. With rising home prices weighing on homes, along with the pressure of rising interest costs, mortgage lenders are evolving and offering borrowers a variety of products in response.
UK lender Skipton Building Society recently launched “100% or no-deposit mortgages as a lifeline for tenants across the country to help them break out of their trapped rental cycle and onto the property ladder for the first time”. Can be helped to climb”. Alternatively, home loans that last up to 40 years – so-called marathon mortgages – are on the rise. They can make it easier for some people to climb the wealth ladder by extending the payments over a longer period.
But with good reason, mortgage lending standards were tightened after the 2008 global financial crisis. And while these recent waivers may be designed to help struggling borrowers who are caught in the inferno of rising interest rates, rents and home prices, expect homeowners to be very cautious about the risks involved. should remain.
long term loan
Prior to 2007, mortgage terms were rarely longer than 25 years. In December 2007, only 21% of first-time borrowers and 8% of remortgages chose such a long term. While one lender began offering a 40-year fixed-rate product in late 2021, marathon mortgages are long-term loans but typically don’t offer a fixed rate for the term of the loan. By 2022, more than 55% of first-time borrowers and 34% of remortgagors had home loans with a tenure of more than 30 years.
mortgage terms are getting longer
The proportion of new home purchase mortgages taken out for a term greater than 30 years. UK finance
This recent resurgence is most likely due to the affordability benefits of the Marathon mortgage. Extending a loan term allows borrowers to increase the repayment cost of a mortgage over time. It also allows people to buy more expensive homes – a significant advantage in today’s market where average house prices are expected to rise from £190,000 in 2009 to £300,000 in 2023.
home prices rising
Office for National Statistics UK House Price Index
Longer-term mortgages also help borrowers qualify for mortgages under tighter affordability rules introduced by the UK financial regulator in 2014. These rules require lenders to ensure that borrowers have enough monthly income to cover living expenses and other debts after paying off their mortgage.
Spreading the cost out over approximately 40 years allows marathon mortgage holders to lower monthly costs while passing the affordability assessment. Marathon Mortgage does not appear to be a current concern for the regulator.
Of course, a marathon mortgage borrower may shorten their term by years because they refinance to avoid the lender’s standard variable rate. Furthermore, if the base rate decreases over time, the interest payments will drop and the overall mortgage will become more affordable. And, of course, any future increase in income allows the borrower to make higher payments over the term of the loan.
On the other hand, longer term borrowing means significantly higher interest payments. For example, a household borrowing £250,000 at 5% for 25 years would pay a total of £188,600 in interest over the life of the mortgage (assuming for simplicity that the interest rate does not change over the life of the borrower). Keep). But borrowing for 40 years would result in a total interest payment of £328,930 – a staggering £140,330 difference.
Marathon mortgages can also mean borrowers must repay well into their 70s, with the average age of first-time buyers outside London now around 33. For some, this may mean continuing to make mortgage payments in retirement. This should be an important consideration when considering long-term borrowing. This will definitely affect financial security after retirement so careful planning and independent financial advice is important.
Sasun Bughadarian / shutterstock
Due to rising rents, rising prices of food and other essential expenses like energy bills, many first time home buyers are struggling to save the deposit. No-deposit products help first-time buyers break this cycle by swapping rental costs with mortgage payments, allowing them to finally own their own home.
Skipton Building Society has recently launched “100% mortgages”, meaning borrowers don’t need a deposit, aimed at helping first time buyers of homes up to £600,000 get on the property ladder .
Such products were commonly available prior to the 2008 financial crisis. But the sharp drop in home prices – mainly the 20% drop between 2007 and 2009 – is said to have left nearly a million households stuck in negative equity. This occurs when your home is worth less than the mortgage you owe on it, leaving you unable to sell your assets.
The danger now is that the average house price today is much higher than in the pre-financial crisis period (£300,000 vs £190,000). Therefore, if such a price collapse were to occur in the near future, the impact would be even more devastating for no-deposit mortgagors. Although there is no chance of decline, but the prices of houses are expected to decline.
Read more: UK house prices: history says the market is in a protracted recession, not a crash
As we experienced in the aftermath of the 2008 financial crisis, the easing of lending norms as well as borrowing beyond means can have dire consequences. It is important for borrowers to be aware of these risks and be very cautious when thinking about borrowing for long periods, especially without a deposit.