Are 40 Year Mortgages a Good Idea
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A recent analysis of the lending policy of the top 125 mortgage lenders found
that approximately 30% were now offering mortgage terms of 40 years of more.
Furthermore this trend to longer mortgages is becoming more popular as first
time buyers struggle to get on the property ladder.
Long term mortgages of 40 years and more have been criticised by some
consumer groups who argue it is likely to increase the debt burden on
householders. There are some problems inherent in 40 year mortgages.
1. Buyers will pay much more interest the longer the mortgage term is. This
effectively reduces their disposable income over the period of their mortgage.
2. It maybe some people are continuing to have a mortgage into their
retirement. Thus there are concerns as to whether people will be able to pay
their mortgage payments in retirement.
3. Longer mortgage terms are often synonymous with borrowing far greater
amounts. It enables consumers to get mortgages upto 5 or 6 times there salary.
This increases their potential debt burden if interest rates were to crash or
house prices were to fall. It makes the consequences of negative equity more
4. Longer mortgage terms have enabled more people to keep buying and thus
have been inflating house prices above their sustainable level
However despite these criticisms there are certain advantages of 40 year
1. Without a 40 year mortgage many UK first time buyers would be unable to
buy. In the long term buying is a better option than renting. It is true people
may have mortgage payments close to retirement, but if they continue to rent
rather than buy then they will also have to pay rents.
2. Over a period of 40 years inflation will reduce the real value of mortgage
payments, making them easier to pay.
3. Home ownership gives greater stability than renting. If you stay renting
then you are always at the mercy of a landlord.
4. If your financial situation improves then in the future you should be able
to switch your mortgage to a more flexible system which allows owners the option
to pay off the 40 year mortgage early.
It seems that 40 + year mortgages are here to stay. They are a response to
the changing climate of the UK housing market and a reflection of increased
flexibility. Whilst house prices remain valued at these record levels they will
continue to remain an attractive option to UK homeowners.
About the Author
R.Pettinger is an Economics teacher at Oxford and writes
frequently on the UK economy and mortgages. He edits a site about
Mortgages including a guide to different types of mortgages.
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Article Published/Sorted/Amended on Scopulus 2007-04-20 08:18:02 in Business Articles