An affordable solution or a costly compromise?

The cost of living is rising, and many homeowners and aspiring buyers are feeling the pinch. An increasing number are extending their mortgage terms to 35 or even 40 years to keep their monthly repayments manageable.

Over the past year, there has been a 10% surge in applicants choosing a 40-year mortgage term, and 38% of all applicants now favour terms of 30-35 years[1]. This shift towards longer mortgages comes as no surprise. With property prices skyrocketing faster than salaries, shorter mortgage terms have become a luxury many first-time buyers cannot afford. In fact, up to 67% of all available mortgages now allow terms of up to 40 years.

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Talking to your lender as soon as possible to make them aware of your situation is key

Over the past year and a half, the Bank of England’s base rate increases have led to a spike in monthly mortgage payments, making it increasingly difficult for some mortgage holders to meet their obligations.

This is particularly true for those transitioning from five-year fixed rates, who may face a sudden rise in payments if they hadn’t anticipated the increase in mortgage rates. In 2018, fixed rates were below 2%; however, currently, the best rates hover around double that for fixed and variable mortgages at 60% LTV. As a result, some borrowers may find themselves paying twice as much as before.

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Transforming the landscape for prospective homeowners and current mortgage holders

Since the government’s mini-budget announcement on 23 September 2022, mortgage rates have soared. It’s as if they’ve been loaded onto a financial rocket and launched into the stratosphere, transforming the landscape for prospective homeowners and current mortgage holders.

To buy a home in the UK, first-time buyers save between £26,400 and £144,500, according to new data[1]. The average deposit paid by a UK first-time buyer for a three-bed home in 2023 is £34,500 for a £240,000 home. This effectively amounts to a 15% deposit for the property. However, the amount you need to save varies according to where you live in the UK and, of course, the level of deposit you wish to pay.

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Mortgage repayments take up almost 40% of people’s average take-home pay

According to recent data, the number of mortgage applications has not declined despite interest rates rising to the highest level in 15 years[1]. However, the data has highlighted a sharp increase in borrowing costs, likely impacting activity in the housing market.

As a result of the recent economic climate, house prices dropped 3.5% in the year to June, the most significant fall since 2009. The Bank of England has raised interest rates to slow inflation. At the time of writing, the latest Bank of England base rate is 5.00%. This is an increase of 0.50%, announced by the Bank of England (BoE) on 22 June 2023.

According to the research, the data shows mortgage repayments are now taking up almost 40% of people’s average take-home pay compared to 30% previously. Although the cost of borrowing money over longer terms had risen, it has yet to have the same negative impact on sentiment, the research highlights.

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