First-time buyers and second-steppers are increasingly opting for longer mortgage terms in a bid to make home ownership more affordable.

The Bank of England is worried about the trend, which has seen a growing number of borrowers opting to pay their mortgage back over 35 years or more instead of the standard 25-year term.

Its data shows that nearly 16% of mortgages taken out in early 2017 were for at least 35 years, up from just 2.7% when records began in 2005.

The reason behind the shift is the widening gap between earnings and house prices and also tougher mortgage affordability tests that have come into force over recent years.

The stricter rules mean lenders have to show the regulator that borrowers can comfortably afford their monthly payments after all their expenses are taken into account.

Taking a mortgage out over a longer term means that a borrower’s monthly repayments are lower, however they will pay more in total over the lifetime of the loan. 

A £200,000 mortgage on a rate of 3%, for example, would cost £948 a month or a total of £284,478 if repaid over 25 years. If you spread the repayments over 35 years instead it would bring the monthly cost down considerably to £770, but you would end up paying an extra £38,723 in interest over the lifetime of the mortgage taking the total cost of the loan to £323,201.

The Bank of England’s concerns are that, with many people not getting onto the property ladder until their mid-thirties and then taking out loans for the next 35 or so years there’s a risk that more people will end up carrying their debts into retirement.

However, taking out a longer mortgage term can still be a sensible strategy to make home ownership more affordable in the early stages of your career when earnings are lower.

Every few years when you come to remortgage onto a new rate there is an opportunity to review your mortgage term with your broker and if your income has increased following a promotion or career change it may be possible to shorten the term to try and pay off your home loan sooner.

Simon Checkley, managing director of Private Finance, says: “The Bank of England is right to keep an eye on this part of the market, but I hope that it doesn’t decide to introduce more regulation to curb longer mortgage terms.

“They present an important tool to help younger borrowers make home ownership more affordable in the early years. 

“Borrowers who do decide to take out longer-term mortgages should continue to keep their plans under review by speaking to their mortgage broker at regular intervals and try and shorten the term, or pay off lump sums as and when they can afford to.”

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