Mortgage lending caps now well below average house price
The Bank of England says one in four mortgages will end when the mortgage borrower is in retirement, as more people extend mortgage terms to make repayments more affordable.
The Bank says over half (51%) of mortgage borrowers now opt for a 30-year mortgage or longer, while between 2021 and 2023, the average mortgage term length for a first-time buyer increased by a year, from 28 years to 29.
Re-mortgaging has seen the biggest increase in average term length: in 2021 the average mortgage term for re-mortgaging was 21 years, whereas by 2023, the average mortgage term for re-mortgaging increased to 23 years, an increase of two years.
The average property now costs seven times the average person's salary. This is significantly higher than the four-to-five times salary cap that many mortgage lenders use as a guideline.
U-switch money expert Kellie Steed, analysing the data, says: “According to Zoopla the current average property value in the UK is £264,500, which means someone on an average salary of £34,900 would need to borrow more than seven times their annual salary to take out a large enough mortgage to buy it. The vast majority of lenders cap their lending way below this.
“It’s unsurprising, therefore, that many are resorting to ‘mammoth mortgage’ terms in order to stretch their affordability to the absolute maximum. However, first-time buyers are not the only ones affected. There has been a less significant, but certain increase in average mortgage term lengths across the board since the Bank of England base rate began to rise in December 2021.”
She continues: “Put simply, the longer your mortgage term, the smaller your monthly repayments. Borrowing the same amount over a longer term stretches your affordability, potentially reducing unaffordable monthly repayments to affordable ones.”
And she adds: “With mortgages, the shorter the term, the less interest you’ll pay overall, no matter what interest rate you’re able to get. For example, even in the days of 1% mortgage interest rates, paying 1% interest over 35 years will clearly result in paying more than 1% interest over 25 years.
“That said, interest rates are typically in the region of four to eight times these days, depending on your circumstances and the mortgage type, so that additional 10 years of repaying interest will make a much more significant difference in what you pay overall.”
