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Guardian Debate

Living on borrowed time

Forty-year mortgages mean people will still be paying off loans out of their pensions. But that is the harsh logic of the housing market.

Rupert Jones

Confirmation has come this week that the traditional mortgage as we knew it has been consigned to the history books. Go back just a few years and we were all taking out home loans lasting for, at most, 25 years, and borrowing perhaps a maximum of three times our income. Oh, and we'd take out one of those endowment policy things to pay off the loan and provide us with a nice cash lump sum, too.

Endowments, of course, were exposed some time ago as a dead loss. Then, last week, it emerged that high street bank Abbey is allowing homebuyers to borrow up to five times their salaries. Others, such as Northern Rock, will go higher still.

Today brings news that the maximum mortgage term of 25 years also seems to have been abandoned, with some banks and building societies now prepared to offer home loans lasting more than 50 years. Abbey (yes, them again) will apparently let home-buyers desperate to get on to the housing ladder take out a 57-year mortgage, while Tesco's banking arm will go up to 52 years.

The only barrier to such borrowing is the age at which you start: as Abbey's home loans must be paid off by age 75, you would have to be no older than 18 to take out a 57-year mortgage, whereas a typical first-time buyer is now in his or her mid-thirties.

Still, the basic story stands: it is a fact that growing numbers of first-time buyers struggling to afford today's property prices are being encouraged to tie themselves into mortgages that some of them will still be paying off when they are pensioners. Halifax, Britain's biggest mortgage lender, will go up to 40 years, as will HSBC, while Bradford & Bingley will do 45 years.

It is rocketing house prices that are to blame for this phenomenon. With homebuyers requiring bigger and bigger mortgages, banks and building societies have come up with a clever wheeze for keeping the home-buying market booming: stretching the term of the loan in order to reduce the monthly mortgage bill.

But this conjuring trick has a sting in the tail. Yes, you pay less each month, but you're paying out over a much longer period. The effect of interest repayments is that, at the end of that 40- or 50-year term, you'll have paid out far more than if you had opted for an old-fashioned 25-year loan.

For example, if you took out a £200,000, 25-year mortgage, with an attractive rate for the first two years and then a higher rate thereafter (let's say 6.5%), you would pay £1,329 a month from year three onwards. If you stretch the term to 40 years, that monthly payment falls to £1,157 - a saving of £172 a month. That's a pretty handy amount. But after 40 years you'd have paid back £155,000 more in mortgage payments than if you'd gone for 25 years. That's to say nothing of the fact that, if you're still paying off the loan after you've retired, you'll have to find those mortgage payments out of your decimated occupational pension.

Today's interest rate rise - up 0.25% to 5%, the highest level in five years - will intensify the debate about the hurdles which homebuyers must jump in order to get on to the property ladder, and the pressures bearing down on those who have signed up for their first mortgage. It's easy to slam the lenders for loosening their purse-strings, but with house prices galloping ahead of earnings, something's got to give. That old mortgage model simply doesn't bear any reality to today's housing market.

If we want ordinary people to be able to buy a home, the rules have got to change.


My twopennyworth:

Rubert - for an economics journalist at the Guardian you appear to know very little about economics.

Housing is a good of relatively fixed stock. It's price therefore depends on amount of liquidity available to purchase it (Keynes called this 'effective demand' - look it up, it's quite an important concept).

The amount of liquidity in the market (the amount that lenders lend) therefore to a very very large extent dictates the price of the house.

You are therefore putting the horse very much in front of the cart.

The loosening of lending criteria (and the pumping of money into the housing market) has been primarily driving the increase in prices - if you want to bring prices down you need to tighten lending criteria. If you want to pump more money in through 40 year mortgages, 5x income you'll just see prices jump up still further.

Next time can we pass these comment pieces onto Ashley Seager - he seems to have a better grasp of these things.

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