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First Time Buyers Opt For Longer Mortgages

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An article in the Guardian highlights the fact that FTBs are moving towards longer mortgage terms in order to increase their buying power.

http://www.theguardian.com/business/2013/sep/13/first-time-home-buyers-mortgage-bubble

From the article:

"Figures from LSL, the second biggest estate agency chain in the country

with brands such as Your Move, reveal that, on average, first-time buyers

are choosing repayment terms of between 27 and 30 years. London & Country,

one of the UK's biggest mortgage brokers, also revealed that the average

length of mortgage taken out by its first-time buyer customers is now 26.8

years."

Checking the most recent stats from the CML, 27 years seems about right, but LSL's claim of 27 – 30 as an average seems a bit of a stretch. However we're faced with the problem again of whether we're dealing with the median or mean borrower and also the CML's numbers may be somewhat lagged. Considering the desperation of some buyers these days it's possible that we're quickly heading towards 30-year terms.

Whatever the exact number, it's clear that we've moved beyond the traditional 25-year maximum, and I'm not sure that most people are aware of just how much a relatively short extension of mortgage duration can change the dynamics of the housing market, especially when interest rates are very low.

Taking the most recent CML numbers (and rounding a little for convenience) the median mortgage payment for FTBs is currently £583 p/m (7K p.a.) at an interest rate of 3.7%.

With a 25-year mortgage term this equates to a loan of £114,000.

With a 27-year mortgage term the loan is £119,400.

So, in the absence of rising incomes, house prices can still be driven higher through mortgage term extension.

At 30 years the max loan is £126,700, and the Guardian article states that a number of FTBs are now taking 40-year loans, which allows a mortgage of £146,000 using our median numbers.

In the Mortgage Market Review the FSA originally planned for lenders to assess affordability on a maximum 25-year mortgage term, but this was strongly opposed by the lenders and subsequently dropped.

I won't go into the implications of such extended mortgage terms in respect of total interest paid and the effects of a rise in interest rates.

This is one area where I think the FPC may eventually exercise its powers – capping mortgage terms. If it doesn't do so then a further significant rise in house prices is definitely a possibility despite strained household incomes.

[To be clear, I'm against intervention by authorities, but only providing borrowers face full responsibility for their actions. In the present environment bad financial decisions are not being punished and it will be those who haven't stretched themselves who will be required to pick up the tab if things go wrong.]

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An article in the Guardian highlights the fact that FTBs are moving towards longer mortgage terms in order to increase their buying power.

http://www.theguardian.com/business/2013/sep/13/first-time-home-buyers-mortgage-bubble

The only control needed to prevent a buble is sensible lending,the fact that wages are almost static on average and lending multiples are at present excessive there should be almost no movement in prices.

Mortgages over 25 years have been talked about for a long while and will not be given to everyone.Eg older lenders and older property are just a few examples.

From the article:

"Figures from LSL, the second biggest estate agency chain in the country

with brands such as Your Move, reveal that, on average, first-time buyers

are choosing repayment terms of between 27 and 30 years. London & Country,

one of the UK's biggest mortgage brokers, also revealed that the average

length of mortgage taken out by its first-time buyer customers is now 26.8

years."

Checking the most recent stats from the CML, 27 years seems about right, but LSL's claim of 27 – 30 as an average seems a bit of a stretch. However we're faced with the problem again of whether we're dealing with the median or mean borrower and also the CML's numbers may be somewhat lagged. Considering the desperation of some buyers these days it's possible that we're quickly heading towards 30-year terms.

Whatever the exact number, it's clear that we've moved beyond the traditional 25-year maximum, and I'm not sure that most people are aware of just how much a relatively short extension of mortgage duration can change the dynamics of the housing market, especially when interest rates are very low.

Taking the most recent CML numbers (and rounding a little for convenience) the median mortgage payment for FTBs is currently £583 p/m (7K p.a.) at an interest rate of 3.7%.

With a 25-year mortgage term this equates to a loan of £114,000.

With a 27-year mortgage term the loan is £119,400.

So, in the absence of rising incomes, house prices can still be driven higher through mortgage term extension.

At 30 years the max loan is £126,700, and the Guardian article states that a number of FTBs are now taking 40-year loans, which allows a mortgage of £146,000 using our median numbers.

In the Mortgage Market Review the FSA originally planned for lenders to assess affordability on a maximum 25-year mortgage term, but this was strongly opposed by the lenders and subsequently dropped.

I won't go into the implications of such extended mortgage terms in respect of total interest paid and the effects of a rise in interest rates.

This is one area where I think the FPC may eventually exercise its powers – capping mortgage terms. If it doesn't do so then a further significant rise in house prices is definitely a possibility despite strained household incomes.

[To be clear, I'm against intervention by authorities, but only providing borrowers face full responsibility for their actions. In the present environment bad financial decisions are not being punished and it will be those who haven't stretched themselves who will be required to pick up the tab if things go wrong.]

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An article in the Guardian highlights the fact that FTBs are moving towards longer mortgage terms in order to increase their buying power.

So... they basically accept that the first place they buy is the only place they will ever buy? (at these prices)

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So... they basically accept that the first place they buy is the only place they will ever buy? (at these prices)

No because they don't understand that.

They believe in the ladder, they believe that the most important thing is to buy ASAP at any price and over a short time inflation will shrink their debt and HPI will give them the equity to move. Any other line of reasoning will not compute.

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The average age of ftb has been reported to be rising. I understand it's quite high already though seem to be some variability in reporting but in the range of 30-37. There is some scope but not much but I would expect lenders would not want to push the repayment above 65. Though I wonder what the retirement age will be In 25 years :(

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There is another scenario. I recently bought (booooo!) And was saying to my mate I was going to take a 15 year mortgage because I didn't want to be tied to the bank.

He told me I was nuts - I should take a 30 year mortgage and overpay (maximum overpayment takes the term to about 18 years). That way if any particular month is tight I can effectively reduce my mortgage payment.

If you take a 15 year mortgage you owe what you owe each month. A 30 year mortgage can give flexibility.

Edited by frozen_out

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There is another scenario. I recently bought (booooo!) And was saying to my mate I was going to take a 15 year mortgage because I didn't want to be tied to the bank.

He told me I was nuts - I should take a 30 year mortgage and overpay (maximum overpayment takes the term to about 18 years). That way if any particular month is tight I can effectively reduce my mortgage payment.

If you take a 15 year mortgage you owe what you owe each month. A 30 year mortgage can give flexibility.

The spectre of Interest Only mortgages shows us that while this strategy is a winner in theory, people in general are too ******ed up to follow it through.

Instead this strategy makes thing worse for everyone

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There is another scenario. I recently bought (booooo!) And was saying to my mate I was going to take a 15 year mortgage because I didn't want to be tied to the bank.

He told me I was nuts - I should take a 30 year mortgage and overpay (maximum overpayment takes the term to about 18 years). That way if any particular month is tight I can effectively reduce my mortgage payment.

If you take a 15 year mortgage you owe what you owe each month. A 30 year mortgage can give flexibility.

Have you done the sums to see what the difference in total repayment is between the two?

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An article in the Guardian highlights the fact that FTBs are moving towards longer mortgage terms in order to increase their buying power.

http://www.theguardi...mortgage-bubble

From the article:

"Figures from LSL, the second biggest estate agency chain in the country

with brands such as Your Move, reveal that, on average, first-time buyers

are choosing repayment terms of between 27 and 30 years. London & Country,

one of the UK's biggest mortgage brokers, also revealed that the average

length of mortgage taken out by its first-time buyer customers is now 26.8

years."

Checking the most recent stats from the CML, 27 years seems about right, but LSL's claim of 27 – 30 as an average seems a bit of a stretch. However we're faced with the problem again of whether we're dealing with the median or mean borrower and also the CML's numbers may be somewhat lagged. Considering the desperation of some buyers these days it's possible that we're quickly heading towards 30-year terms.

Whatever the exact number, it's clear that we've moved beyond the traditional 25-year maximum, and I'm not sure that most people are aware of just how much a relatively short extension of mortgage duration can change the dynamics of the housing market, especially when interest rates are very low.

Taking the most recent CML numbers (and rounding a little for convenience) the median mortgage payment for FTBs is currently £583 p/m (7K p.a.) at an interest rate of 3.7%.

With a 25-year mortgage term this equates to a loan of £114,000.

With a 27-year mortgage term the loan is £119,400.

So, in the absence of rising incomes, house prices can still be driven higher through mortgage term extension.

At 30 years the max loan is £126,700, and the Guardian article states that a number of FTBs are now taking 40-year loans, which allows a mortgage of £146,000 using our median numbers.

The rate of interest on a 30 or 40yr mortgage will be higher than the median rate over 25yr.

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The length of the loan is already very flexible.....thousands must already have exceed their 25 year promise, more so if they have used the equity as extra spending money or because of cost have reverted to interest only....mortgages often extend into retirement....how long before someone's inheritance is found to be a mortgage liability not the asset they thought it would be?....the mortgage is passed onto the next of kin. ;)

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There is another scenario. I recently bought (booooo!) And was saying to my mate I was going to take a 15 year mortgage because I didn't want to be tied to the bank.

He told me I was nuts - I should take a 30 year mortgage and overpay (maximum overpayment takes the term to about 18 years). That way if any particular month is tight I can effectively reduce my mortgage payment.

If you take a 15 year mortgage you owe what you owe each month. A 30 year mortgage can give flexibility.

To add, if you are on a fixed rate, say a 5 year fix deal calculated for a 30 year then the monthly repayment is lower that a 25 year, the difference in capital that you should be repaying you can invest and structure into later over payments (normally 10% of balance without a penalty annually). Better to have the cash in your account than the lender's. Over paying shortens the loan term but not the monthly payment, until you need to remortgage. When you would try to hammer down to the next better LTV deal range etc. All well and good as long as your equity doesn't get wiped out and rates rocket upward :o, hence try to stay close to the 3x salary to debt rule. In an environment where IRs are lower than inflation, why rush to pay off the debt? This is the anomaly created by lower IRs to get debt deleveraging, there's no incentive to deleverage when low IRs appear to become the norm and Carney tells you they ain't going to rise for years.

Obviously there are pitfalls as mentioned in other posts and this repayment strategy (or lack of in most cases with full Interest Only mortgages) has been abused to the point where it is one of the credit traps that distorts the market now.

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The rate of interest on a 30 or 40yr mortgage will be higher than the median rate over 25yr.

I'm just using simplistic calcs from a spreadsheet, just as the Guardian article did.

I probably shouldn't have put numbers up because people will now pile in with real-world examples that dispute the calcs.

The intention is merely to demonstrate that increasing duration allows FTBs to bid higher for a property.

As far as I'm aware Halifax (for example) does 5-year fixes where the APR is the same whether the mortgage is 25 or 30 years (although the interest rate will be higher than 3.7% of course).

To quote from the article:

"Extended mortgage durations are seen by economists as a common sign

of a property market under stress. During Ireland's pre-2007 property

boom, mortgage terms of 30 and 35 years became common, while in Canada,

Mark Carney, now governor of the Bank of England, worked with the country's

finance minister twice to rein back mortgage duration periods from 40 to

25 years to quell a property boom."

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I'm just using simplistic calcs from a spreadsheet, just as the Guardian article did.

I probably shouldn't have put numbers up because people will now pile in with real-world examples that dispute the calcs.

The intention is merely to demonstrate that increasing duration allows FTBs to bid higher for a property.

As far as I'm aware Halifax (for example) does 5-year fixes where the APR is the same whether the mortgage is 25 or 30 years (although the interest rate will be higher than 3.7% of course).

To quote from the article:

"Extended mortgage durations are seen by economists as a common sign

of a property market under stress. During Ireland's pre-2007 property

boom, mortgage terms of 30 and 35 years became common, while in Canada,

Mark Carney, now governor of the Bank of England, worked with the country's

finance minister twice to rein back mortgage duration periods from 40 to

25 years to quell a property boom."

Not disputing the logic just the size of the effect.

These extended term mortgages are really I/O lite products, the rate of equity accumulation is so slow that basically you're trapped in the property once you take one on.

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Not disputing the logic just the size of the effect.

These extended term mortgages are really I/O lite products, the rate of equity accumulation is so slow that basically you're trapped in the property once you take one on.

Ultimately I think it relies on positive real income growth. Without that you're liable to be screwed when rates rise.

I just tapped some numbers into Halifax's online calculator.

First is 112.5K on 140K property (80% LTV) and second is 125K on 150K (83% LTV):

MortEx25.gif

MortEx30.gif

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The average age of ftb has been reported to be rising. I understand it's quite high already though seem to be some variability in reporting but in the range of 30-37. There is some scope but not much but I would expect lenders would not want to push the repayment above 65. Though I wonder what the retirement age will be In 25 years :(

It's already 68 for people born in the same year as me (1982).

Edited by Dorkins

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An article in the Guardian highlights the fact that FTBs are moving towards longer mortgage terms in order to increase their buying power.

I'm surprised it's only 27 years I thought last year we had a thread saying 28 years. Though that could have been with one specific lender.

Various government schemes are 35 year mortgages.

Thread about the Guardian's article same time last year.

http://www.housepricecrash.co.uk/forum/index.php?showtopic=182999&st=0

Article here says 28 years.

http://www.laceysyeovil.co.uk/news/Feature-News-167/articles/How-much-have-the-housing-and-mortgage-markets-changed-since-the-financial-crisis-103720.aspx

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There is another scenario. I recently bought (booooo!) And was saying to my mate I was going to take a 15 year mortgage because I didn't want to be tied to the bank.

He told me I was nuts - I should take a 30 year mortgage and overpay (maximum overpayment takes the term to about 18 years). That way if any particular month is tight I can effectively reduce my mortgage payment.

If you take a 15 year mortgage you owe what you owe each month. A 30 year mortgage can give flexibility.

This is exactly what we have just done. A 30 year term with Santander on their lifetime tracker mortgage. We can overpay each month and if the worst case scenario happens and we both lose our incomes, jobseekers allowance will cover the mortgage payments.

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I'm surprised it's only 27 years I thought last year we had a thread saying 28 years. Though that could have been with one specific lender.

Various government schemes are 35 year mortgages.

Thread about the Guardian's article same time last year.

http://www.housepricecrash.co.uk/forum/index.php?showtopic=182999&st=0

Article here says 28 years.

http://www.laceysyeovil.co.uk/news/Feature-News-167/articles/How-much-have-the-housing-and-mortgage-markets-changed-since-the-financial-crisis-103720.aspx

This is from the FSA's Mortgage Market Review:

MMR_AvTerm.gif

...which puts the average at 28 years in Q2 2012, so I'm obviously underestimating things.

As I said in the OP though, there may be a difference between the median and mean mortgage term.

Whatever, the trend is upwards and comparisons on affordability with (say) the 1990s aren't really comparing like with like.

(Nice to see you again Democorruptcy and thanks for the links. I'm obviously behind the curve on this issue.)

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There is another scenario. I recently bought (booooo!) And was saying to my mate I was going to take a 15 year mortgage because I didn't want to be tied to the bank.

He told me I was nuts - I should take a 30 year mortgage and overpay (maximum overpayment takes the term to about 18 years). That way if any particular month is tight I can effectively reduce my mortgage payment.

If you take a 15 year mortgage you owe what you owe each month. A 30 year mortgage can give flexibility.

When we last moved we went for a 30 yr deal over the 25 as it gave a bit more flexibility in payments but we did start overpaying immediately.

However we are problem the exception to most people who will not overpay but spend the money.

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banker propaganga machine says...everyone else are paying full asking price for houses and borrowing more for longer to do it...give us your income for life.

the propoganga is relentless at prssent...they must be desperate.

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This is exactly what we have just done. A 30 year term with Santander on their lifetime tracker mortgage. We can overpay each month and if the worst case scenario happens and we both lose our incomes, jobseekers allowance will cover the mortgage payments.

That's not the worst thing that can happen.

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This term length is also tied up with what Freetrader brought up the other day of FTB borrowers maxing out to the current interest rate environment.

Oh I went to a lender yesterday, and they were offering 2.89% fixed for 4 years at 4X salary. When I went a few years back it was 3.5% (approx.) which was cheap money then.

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This is from the FSA's Mortgage Market Review:

MMR_AvTerm.gif

...which puts the average at 28 years in Q2 2012, so I'm obviously underestimating things.

As I said in the OP though, there may be a difference between the median and mean mortgage term.

Whatever, the trend is upwards and comparisons on affordability with (say) the 1990s aren't really comparing like with like.

(Nice to see you again Democorruptcy and thanks for the links. I'm obviously behind the curve on this issue.)

That chart suggests that the average mortgage term across all borrowers (presumably including BTL) is significantly lower today than in 2007, and contracting rather than growing,

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That chart suggests that the average mortgage term across all borrowers (presumably including BTL) is significantly lower today than in 2007, and contracting rather than growing,

Yes, one of the surprising things I keep seeing is the proportion of property that is paid up. I guess average mortgage length could be coming down if lots of people with a few years left are moving to better terms - and few FTBs are entering market.

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