Lenders have a new wheeze when it comes to lending money to home buyers. Now interest-only loans have been outlawed for all except buy-to-let borrowers they have moved to the next best thing (for lenders, that is, not borrowers) – 40 year mortgage loans.
In particular, lenders are circling first time buyers who are back in the market. According to the mortgage statistics for last year, mortgage approvals rose by 122,000 to 734,969. First-time buyer numbers are well up. For example,they took out 27,000 loans in November, 2013, a rise of just 0.7% compared to October, but up 24% compared to November 2012.
First time buyers are more likely to be into the 30s rather than in their 20s. And you need to keep this in mind when you look at the so called benefits of 40 year mortgage loans.
Lenders may well sell these long loans on their affordability and this may look very attractive to the thirty-somethings entering the property market after years of paying rent. After all, a £220k loan at 4% over 25 years will cost around £1,160 a month while its 40 year equivalent will be £240 a month cheaper at £919.
This is sounds like a bargain but the lenders are the ones that win with these loans. Just think how much more you pay in interest over the longer period? Almost 50% more.
Those desperate to get on the housing ladder need a strategy if they take out a longer-term loan. They need to use every opportunity to pay off more from their loan, particularly in the early years, so they can start to consider a shorter loan period. And they need to be constantly on the look out for better deals as their ability to pay improves (perhaps as they climb up the career ladder).
Bite the hand off a lender waving a 40 year loan at you and that’ll just be another reason why you have to carry on working until you’re well into you 70s – to pay the darned thing off.
There are even a couple of 50 year options out there. Beware.