In the face of rising interest rates and escalating property prices, an increasing number of UK homebuyers are turning to 40-year mortgages. The total value of 40-year mortgages in the UK has surged by 39% over the past year, reaching £14.4 billion as of June 30, 2024, compared to £10.3 billion in the previous year. This significant increase highlights a trend where more homebuyers are extending their mortgage terms to make monthly payments more manageable in the current economic climate.
Rising interest rates drive demand for long-term mortgages
With interest rates rising steadily over the past two years, more homebuyers are being pushed towards these extended-term mortgages as a way to achieve lower monthly repayments. However, stretching repayments over four decades means that the total cost of a 40-year mortgage can be significantly higher. On average, buyers with 40-year mortgages end up paying 32% more in interest than those with traditional 25-year terms.
High interest rates mean that homebuyers taking on 40-year mortgages are ultimately paying back a greater amount over a longer period. This recent surge in long-term mortgages highlights a growing concern: do buyers fully understand the financial burden they’re committing to in the long run?
In spite of the greater financial burden of 40-year mortgages, the number of sales of these long mortgages has risen 37% to 64,000 in 2023/24, up from 46,000 in 2022/23. The number of sales is up 213% over the past five years (at 20,000 in 2019/20) – while the total loan value has more than tripled in the past five years from just £3.9 billion in 2019/20.
The short-term appeal versus long-term financial cost
One of the primary drivers behind this trend is the ongoing house price inflation. The average UK home now costs around £330,000, according to the latest ONS data. At such high prices, many buyers are left with little flexibility in their budgets to pay down loans quickly. The eye-watering cost of buying a house today makes the lower monthly repayments of 40-year mortgages very attractive to buyers trying to get on the property ladder.
For many first-time buyers, the primary focus is on monthly affordability, rather than the total cost of the loan. The lower monthly payments of a 40-year mortgage may initially seem like a lifeline, but the added long-term interest can result in a significant financial burden. When choosing a 40-year mortgage, buyers need to consider that while they may feel financially comfortable in the short term, the ultimate cost of the loan will be far greater.
How can we help
Understanding and handling the complexities of mortgage options in today’s economic environment can be challenging, especially in light of increasing mortgage costs. Our wealth management team at LFWM is here to help you build a strategy that supports your home ownership goals while protecting and growing your broader financial portfolio.
If you’re seeking guidance and need expert advice, we would be happy to discuss your current situation with you and help you make the best decision you can with all of the available facts. For a confidential discussion, please reach out to our Director, Andrew Tricker (andrewtricker@lfwm.co.uk).