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"Bonkers" and "dangerous for first-time buyers" - Brokers deliver their verdict on 40-year mortgages

ended 27. July 2023

With talk of ‘Dutch-style’ mortgages being discussed in Government, UK newswire, Newspage, asked brokers if 40-year mortgages are a good idea. The consensus appears to be not, with one saying it's “bonkers”, another that it's "dangerous for first-time buyers",  a third saying “this is fiddling while Rome burns” and a fourth simply: “Not more extend and pretend”. Their views are below.

14 responses from the Newspage community

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Darryl Dhoffer
Founder at The Mortgage Geezer
It's a bonkers idea and means more interest. With a 40-year mortgage, you'll be paying interest for a longer period. This means that you'll end up paying more interest overall. For example, if you take out a 40-year mortgage at 4% interest on a £200,000 loan, you'll pay £140,000 in interest over the life of the loan. If you take out a 30-year mortgage at the same interest rate, you'll pay £108,000 in interest. You'll build equity slower, too. With a 40-year loan, you'll be paying more of your monthly payment towards interest and less towards capital. This means that it will take you longer to build equity in your home. For example, after 10 years, you'll have only paid off about 20% of your loan with a 40-year mortgage. With a 30-year mortgage, you'll have paid off about 35% of your loan. You'll be more vulnerable to interest rate changes too: if interest rates reduce, you could be losing out on lower repayments if you are tied into a 40-year mortgage with high Early Repayment Charges.
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Michelle Lawson
Director at Lawson Financial
As with all mortgages, some are right for some and not for others and different people have different thoughts and goals. This is the reason for the diverse options and choice available. As long as the applicants are aware that they are spreading the cost over a greater period of time and they will pay more in the long run, I don't see the harm. It is important that they discuss the implications and advantages. It is all about making your mortgage work for you too and nothing is or has to be forever.
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Riz Malik
Independent Financial Adviser at R3 Wealth
We should think about using long-term fixed rates, especially with recent events. But whether these rates work out or not really depends on how flexible they are. If they let people pay more than they have to, can be transferred, and don't have any serious limitations, then people might start using them. However, even though we've had long-term rates around for a while when rates were low, people never really used them much. Long-term fixed rates are not the solution to help first-time buyers in isolation.
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Stephen Perkins
Managing Director at Yellow Brick Mortgages
40-year terms are a short-term necessity for many first-time buyers to be able to secure affordable mortgage payments. This will over that term cost them enormous amounts of additional interest, but for most, they will hope that, as their equity grows, they can look to reduce their mortgage term at future mortgage reviews. Ultimately, many will care more about the monthly payment now than the total amount of interest over the lifetime of their mortgage.
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Andrew Montlake
Managing Director at Coreco
There are few lenders waiting in the wings to bring to market a new breed of longer-term mortgages which crucially need to be very different from the traditional form if they are to be successful. They need to be competitively priced, have little or no Early Repayment Charges and allow much greater borrowing capacity.
The UK has long been an outlier in the provision of these types of loans and this would be a well needed addition to the mortgage market, giving borrowers more choice. However, no one is under any illusions that this will do anything to help solve the housing issue.
To do this we need a long-term joined up housing strategy, building a mixture of social, affordable and private housing together with the infrastructure needed to really make a difference.
Until this is done everything else is just window dressing.
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Rohit Kohli
Director at The Mortgage Stop
40-year fixed-rate mortgages offer first-time buyers an important avenue towards homeownership in today's challenging housing market. They can help provide more manageable monthly payments, particularly amid high property prices and rising interest rates. Furthermore, the potential to make overpayments and exit without fees in the future provides an opportunity to remortgage to reduce the term in the future and mitigate the longer-term overall cost. This isn't right for everyone but could work for some clients in the right circumstances.
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Justin Moy
Managing Director at EHF Mortgages
Anything much longer than five years would be dangerous for first-time buyers, typically this is one of the client types that suffer most from early redemption, so any longer-term products for this type of client are not going to be popular. Longer-term mortgages to aid affordability are going to be a feature of our market, but longer-term products will have limited appeal. It will need some exceptional product design to provide flexibility and reduced early repayment charges, which will make these products very expensive.
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Elliott Culley
Director at Switch Mortgage Finance
A 40-year term will make mortgage payments more manageable for some and stretching a term over a longer period can also increase the borrowing amount. However, you will pay more interest over the term of the mortgage. Longer terms are favoured by customers trying to get on the housing ladder at a younger age, with the option to reduce the term when income increases.
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Graham Cox
Director at Bridging Hub
Why stop at 40 years? Perhaps the term could be extended until death. That way, first-time buyer's can experience a lifetime of debt servitude and borrow even more, propping up house prices in perpetuity. What the young generation need are much lower house prices, higher wages or both. Not more extend and pretend.
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Rob Gill
Managing Director at Altura Mortgage Finance
Long-term fixed rates are commonplace in other countries and are surely an idea whose time has come in the UK. Crucially, such products have no penalties, making them highly flexible as well as providing security for both the lender and the borrower. The UK property market in general needs longer-term thinking and such fixed rates should be part of the solution.
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Neezam Romjon
Co-Founder at Rebus Financial Services
I suspect 40-year term mortgages will soon become the norm amongst first-time buyers and home movers increasing their mortgage debt. As 1% mortgage rates disappear into the aether and house prices continue to rise, we're already seeing more interest from borrowers stretching out their mortgage term to keep the monthly payments affordable. The upside is that you can minimise what you pay back on a monthly basis, the downside is that you'll pay more interest to the bank in the long-term. Focus on what is your priority, namely paying less monthly or paying less interest overall, and seek advice to fully understand your options.
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Jamie Lennox
Director at Dimora Mortgages
Taking such a long term may seem appealing initially to reduce the monthly outlay. However, the longer the borrowing, it can significantly increase the total amount payable over the full term of the mortgage and could quickly lead to tens of thousands of pounds of extra interest being paid. If customers are to opt for longer terms while rates are high, it's important to make sure they review this regularly as if affordability improves over time they can look to shorten their terms in the future.
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Ashley Thomas
Director at Magni Finance
A 40 year fixed term would be appealing for some as it would give reassurance that they know how much they are paying for the long term. Longer fixed rates are common in other countries such as France. More choice is better in most situations, and this would be the same.
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Amit Patel
Adviser at Trinity Finance
A 40-year mortgage term is great in principle but can have huge implications further down the line. The monthly repayments of course will be much lower, but the total interest repaid at the end of the mortgage term will ultimately work out to be an expensive option. You’ll also build equity in your home more slowly, as you’ll be paying off less mortgage capital each month due to your payments being lower. The Early Repayment Charges can also be costly. Borrower beware.