A SPECIALIST mortgage lender has increased the maximum term on its affordable housing schemes to 40 years.
Pepper Money, which specialises in lending to people who may be overlooked by traditional banks, such as those with poor credit histories, raised its maximum term length from 35 to 40 years.
The lender’s ‘affordable housing’ schemes are a range of mortgages for people buying homes through other affordable home initiatives, such as Shared Ownership.
The change means eligible borrowers could spread their mortgage repayments over a longer period, potentially reducing how much they pay each month.
However, taking out a mortgage over a longer term generally means paying more interest overall, making the loan more expensive in the long run.
The change applies to Pepper Money‘s affordable homeownership mortgage range, including Shared Ownership, Right to Buy, First Homes, Help to Buy Wales and Help to Buy remortgages.
Shared Ownership allows buyers to purchase a share of a property and pay rent on the remaining portion, while Right to Buy gives eligible council tenants the opportunity to buy their homes at a discount.
The First Homes scheme offers eligible first-time buyers in England a discount of at least 30% on certain properties.
Pepper Money’s decision to extend its maximum mortgage term could help some buyers meet lenders’ affordability requirements, as smaller monthly repayments may make borrowing more manageable.
However, applicants will still need to meet the lender’s eligibility and affordability checks.
Borrowers should also bear in mind that a longer mortgage term could mean continuing to make repayments further into later life or retirement.
Are longer mortgages a good idea?
Taking out a mortgage over 40 years instead of the more traditional 25 years can make buying a home more affordable in the short term, helping first-time buyers to get on the housing ladder.
This is because spreading the loan over a longer period reduces the amount you have to repay each month.
However, there are some major downsides to consider before taking out an ultra-long mortgage.
The biggest is that you’ll usually end up paying significantly more interest overall, even though your monthly repayments are lower.
This is because you’re borrowing the money for longer, meaning you’re paying interest over a longer period of time.
For example, someone borrowing £200,000 at an interest rate of 5% would pay around £1,009 a month over 35 years.
Extending the term to 40 years would reduce their monthly repayments to around £964, saving roughly £45 a month, or £540 a year.
But they would pay around £23,000 more in interest over the lifetime of the mortgage.
You’ll also build up equity in your home more slowly, as a smaller proportion of your repayments will go towards paying off the original loan in the early years.
This could leave you with less flexibility if you want to move house or remortgage in the future.
Another concern is that taking out a 40-year mortgage could mean you’re still paying it off well into retirement.
For example, someone taking out a 40-year mortgage at the age of 30 would not finish repaying it until they were 70, unless they made overpayments or shortened the term.
This could put pressure on their retirement finances, particularly if their income falls when they stop working.
However, choosing a longer mortgage term does not necessarily mean being stuck with it for the full 40 years.
Some borrowers may be able to make overpayments or shorten their mortgage term later when they come to remortgage, if their financial circumstances improve.
But it’s important to check whether your lender imposes any charges or limits on overpayments.
Anyone considering a longer mortgage should weigh up the immediate savings against the extra interest they could pay and whether they can afford the repayments in later life.
