The 40-year mortgage – solution to rising property values or too high a price to pay?

A growing number of first-time buyers are opting for 35- or 40-year mortgages in order to be able to buy a home. As house prices and interest rates remain high, buyers are taking out longer loans to keep their monthly repayments affordable, but experts say they risk paying thousands more over the length of the mortgage.
A report from UK Finance, the lenders’ trade body, says that even though households are under less pressure than at the peak of the cost of living crisis, the number of people taking out lengthy loans is “far higher than seen in the past”. In June, 22% of loans taken out by first-time buyers were for 35 to 40 years. Just five years ago, this stood at 6%. More lenders now offer terms of up to 40 years – even 45 in one case.
David Hollingworth at the online broker L&C Mortgages says that lower monthly repayments give first-time buyers breathing space, but can mean the amount they pay in interest can “skyrocket” over the longer term. In the case of a £200,000 loan, this could mean almost £100,000 more in interest payments.
The traditional mortgage term has been 25 years for many decades, but rising house prices and borrowing costs have meant that this has been stretched considerably in the past few years.
Financial data site Moneyfacts says 84% of mortgages on the market now have a maximum term of 40 years. Two years ago, this proportion stood at 57%.
Hollingworth says the majority of lenders will now consider a 40-year term, though some smaller building societies stop at 35 years.
“In the face of house prices that have largely only got higher, there has also been a clear edging-up in the length of term borrowers are prepared to resort to,” he says.
`“More lenders have nudged up the maximum term to 40 years and more borrowers are now electing for a term closer to the upper limit than the traditional 25 years.”
Borrowers are simply trying to make monthly repayments more manageable, says Hollingworth. “Taking a longer term could help someone stretch to the required mortgage level or simply give some breathing space in terms of monthly budgeting by keeping the repayments at a lower level.”
UK Finance says there has been a steady increase over even the past two years – in June 2022, just one in 10 loans to first-time buyers was for 35 years or more.
Last month, the Bank of England cut the base rate to 5%; it had been at 5.25% – the highest level for 16 years – for months.
Now, new lenders specialising in longer-term mortgages are entering the market. Perenna, launched last September, says about half of those applying for its 35- and 40-year products are first-time buyers. Borrowers can leave the long-term deals after five years without early repayment charges.
Nicholas Mendes from broker John Charcol says the lower repayments make long-term loans more attractive to people who would otherwise struggle to qualify for a loan.
“Using longer mortgage terms has become a viable strategy for first-time buyers to manage their outgoings, especially given the rise in house prices,” he says. “They allow buyers to make lower monthly payments while still entering the housing market.”
Using figures from L&C Mortgages, the monthly cost of a 25-year mortgage on a £200,000 home at 4.5% interest is £1,111. With a 40-year mortgage for the same home, the repayment shrinks to £899 – a difference of £212 a month.
Longer terms can get people on to the property ladder, instead of continuing to rent and save while prices increase, says Hollingworth. “It’s impossible to know what a delay in making a first purchase could mean, but many first-time buyers will have seen prices increase and remain stubbornly high. That means a bigger deposit could be needed and, in the interim, paying a high rent without the security that ownership can offer,” he says.
But whether you qualify will depend on your age. Most lenders have a maximum age that customers can be at the end of the mortgage term. If the maximum is 75, a borrower will have to be no older than 35 to take out a 40-year mortgage.
While the monthly payments will be lower, borrowers will be paying them for a lot longer, and there will be a “hefty rise” in the amount of interest they pay over the term, says Hollingworth.
For that £200,000 mortgage arranged over 25 years, the total amount paid in interest will be £133,000, assuming the interest rate remains the same for the whole of the term.
But over 40 years, making the same assumption, the total interest will be £231,000 – a difference of almost £100,000. “Paying interest over a longer period means you eat away at the mortgage balance more slowly,” he says.
Mendes says people on longer-term deals are also more exposed to volatility in the market over time, especially if they are not locked in to a fixed price.
Borrowers will also be less able to take advantage of the better rates that come with an improved loan-to-value (LTV), as the amount of capital borrowed reduces much more slowly.
It is possible that the 40-year mortgage could be stretched even more in the future. Lenders are currently extending the maximum age by which loans can be repaid and even considering people’s income beyond the age of 70, says Mendes.
Lender Vida Homeloans extended its maximum mortgage term to 45 years in October as borrowers were taking up longer terms. However, it says, take-up of the 45-year term has been “modest” so far.