Fluctuating interest rates have led to more people opting for long-term mortgages to reduce their monthly costs, a new survey has revealed.
Half of people surveyed by David Wilson Homes said they would take out a marathon mortgage to get a home.
These mortgages last between 30 and 40 years and allow people to repay their home loan in smaller increments spread over a longer period of time – but there’s a sting in the tail.
“You need to understand that by taking out a mortgage deal over a longer period of time it means you will be paying more over time,” says Terry Higgins, mortgage expert at The New Homes Group.
Those aged 35 to 38 indicated that fluctuating interest rates were the biggest influencing factor in considering a long-term mortgage. The mortgage market has been volatile in the first half of 2024, with products offering better rates being withdrawn when announced. Meanwhile the Bank of England has kept its base rate at 5.25 per cent in an effort to curb inflation.
“Long-term mortgages aren’t exactly new, in fact, they’ve been around for a while and are usually popular with first-time buyers,” explains Higgins.
“However, due to higher interest rates and rising property prices it is now becoming more attractive among a wider audience.”
Higgins has five important points that borrowers should consider before signing up for a marathon mortgage:
By taking longer to pay off your loan, your monthly payments will be lower and you may be able to borrow more. But a 30-plus year loan is a long financial commitment.
“Before taking out a long-term loan, it is important to assess your current financial status. Take savings from sources of income, monthly expenses, outstanding debts, and any savings,” advises Higgins.
“Understanding your financial health will give you a clear picture of your ability to pay and manage your long-term loans responsibly.”
Lower monthly payments may seem like a good idea, but you’ll end up paying more in the end.
“Especially in the early years, you’ll pay less for the loan because a larger portion of your monthly payment will go toward accrued interest, rather than the original loan amount,” Higgins said.
“Especially in the early years, you will pay less for the loan because a larger part of the monthly payment will be the recognized interest, rather than the original loan debt.”
You should read all the fine print when it comes to marathon mortgages.
“Don’t rush into anything without knowing the terms and conditions of the loan. Take the time to review all the details, including the interest rate, repayment schedule, fees, and potential penalties for repayment or default,” he said.
“Make small orders and look for clarification on confusing clauses. Understanding the specifics of the loan agreement will help you make the right decision and avoid unpleasant surprises down the road.
“While it may seem far-fetched to some, your predicted retirement age is something to consider when considering a marathon mortgage,” says Higgins. Think about when you want to retire and have a plan for how you’ll keep up with your mortgage payments if you do – because your lender will want proof.
You’ll also want to think about how you’ll make your monthly payments in the years leading up to retirement.
“Ideally, you should make sure that you have a reliable source of income to cover the loan payments in the long term. Consider potential changes in employment status, such as job stability and salary changes,” said Higgins.
“Evaluate whether your current level of income is sufficient to pay off the loan while still meeting other financial obligations. It is important to have a plan to deal with unexpected financial problems, such as backup savings.
5. Explore alternatives
Marathon mortgages may sound exciting now, but they’re not for everyone.
“Explore other loan options that better suit your needs. Compare terms, interest rates, and repayment options offered by different lenders to find the best solution for your situation,” says Higgins.
“The best advice I can give is to talk to an independent mortgage advisor during the home buying process. They can then discuss your mortgage needs in the short, medium, and long term and conclude that a marathon mortgage is the right choice for you.
