Are lifelong mortgages a good idea?

Are lifelong mortgages a good idea?

Steve Jones
Mortgage adviser at Towry Law mortgages

Some banks are offering 'lifelong mortgages' which can run for up to twice as long as the standard 25 years. Why has this come about and what if anything is in it for the homebuyer?

With the recent press revelation that some homebuyers are being offered 'lifelong mortgages', it seems, at first glance, as if the UK housing market has finally lost its marbles.

However, are these lifelong mortgages an increasing trend we should all be concerned about, or is it just a lot of hot air helping to raise the government and homeowners anxiety levels?

Standard Life, Halifax and Nationwide are among some of the major names that offer mortgages over a 40 year period.

Why would any homeowner want to pay this liability into their retirement when ideally they should be enjoying the fruits of their lifetime of labour?

However, it is not a new phenomenon that's just hit the mortgage world.

Many of these lenders have had the facility to offer extended terms for some time, although admittedly have not actively promoted it.

Retire with a mortgage

With the average estimated age of a first time buyer in the south east being approximately 28 years, those now seeking this longer repayment term will face paying their mortgage past the state retirement age.

Why would any homeowner want to pay this liability into their retirement when ideally they should be enjoying the fruits of their lifetime of labour?

It all comes down to affordability. They want to get onto the property ladder as soon as possible but also want to retain a certain amount of financial freedom to enjoy a comfortable lifestyle.

Extending the term enables many to have their cake and eat it, keeping mortgage repayments as low as possible.

Working longer

The lifestyle-laced concern shown for homebuyers looking to pay their mortgage into retirement could be a red herring.

The major danger will come if significant numbers of homebuyers opt to extend their term this could have a major effect on the overall future wealth of the UK population

There is an increasing feeling among many of the UK population that they do not want to receive their proverbial gold watch at normal retirement age.

Many want to continue working into their late sixties and early seventies so could technically meet their mortgage repayments into their golden years.

The real cost is not therefore necessary to an individual's lifestyle but essentially to their back pocket.

A homebuyer looking to repay a capital and interest loan of £150,000 over 40 years would pay nearly £64,000 more in interest over the term compared to taking the mortgage over the 'traditional' 25 year term.

This is based on the average standard variable mortgage rate of 5.75% offered by many lenders.

What alternative?

The major danger will come if significant numbers of homebuyers opt to extend their term this could have a major effect on the overall future wealth of the UK population.

Anyone opting for a longer term to keep payments low in the early years should therefore look where possible, to make additional repayments as their cash reserves start to build up again.

This will help to reduce this sizeable extra interest payment.

Although every homebuyer's needs are different and should be assessed on an individual basis, there is one final question that does beg to be asked.

If someone is seeking to repay over 40 to 50 years should they be buying a property in the first place?

Many homeowners will reply that they have no other alternative other than renting and ending up with nothing to show for it in the end.