image source, Nicola Webb
- author, Laura Jones
- the role Business reporter for BBC News
Young homebuyers face huge challenges when it comes to getting on – and staying on – the housing ladder.
Nicola Webb, a 34-year-old nurse, felt she had no choice but to opt for a super-long mortgage when buying her first home last year.
It’s due to expire when she turns 68, but she says stretching out the repayments is “the only way I can afford a mortgage as a single homeowner”.
“I didn’t know of any lower mortgage rates, so I just take what I have.”
Although she managed to save up a large deposit on her £147,000 two-bedroom flat in Gloucestershire, the five-year fixed-rate mortgage is costing Nicola £598 a month – around a third of her monthly salary after tax and student fees loans.
Once her student loan is paid off — or eventually written off — she hopes to reduce the length of her mortgage from 35 years, or consider using additional disposable income to pay it off.
She says she is grateful to have been able to get on the housing ladder at all. Although the mortgage costs take up a significant portion of her income, she believes it is still cheaper than renting in her area.
“I’ve had no luck at all with rentals … and for me it’s all about trying to make it as cheap as possible.”
The latest data shows that Nicola’s situation is becoming more and more common.
Figures from the Bank of England show that over the past three years, hundreds of thousands of home owners have taken out mortgages that they will still be paying off until they retire.
While longer mortgage terms may make repayment more affordable in the here and now, homeowners will pay more in interest.
Some in the industry also worry that buyers won’t be able to afford a mortgage when they retire and will tap into their retirement savings to pay off their home loan, leaving them with less to live on in their old age.
But for some, a longer term of 35 or 40 years is seen as a temporary solution as they wait to see if mortgage rates come down from relatively high values.
Martin Tapper, an Essex-based mortgage broker, told the BBC that the majority of first-time buyers he had advised this year had opted for a 40-year term.
“A young family can avoid exorbitant rental costs in order to buy a home where the mortgage cost is much cheaper for a longer term,” he suggests.
He adds that he would only refer a client to these longer terms if they were “right,” saying he always recommends going back to a shorter term later if possible, such as if the client’s salary has increased or when they move home.
And, he says, it’s important to get insurance to protect yourself from having to make payments if you become ill or lose your job.
For 30-year-old Shane Lees, weighing the pros and cons of a subprime mortgage was a serious exercise.
He and his partner are remortgaging to buy a three-bedroom house in West Sussex where they can start a family.
After talking to six to seven mortgage brokers, they decided to go with a 35-year mortgage, reducing to 25 years at the end of a two-year fixed deal.
Shane says he and his partner are now less likely to go above and beyond their budget because of the prospect of higher monthly payments.
They chose a lender Shane describes as “realistic” who would be willing to renegotiate at the end of a two-year fixed deal, while most were offering a rate of around 5.5%.
The pressures facing young homeowners like Shane are pretty clear, with the proportion of mortgages being taken out by people over the state pension age rising sharply.
The number of homeowners under the age of 30 who take out such mortgages has more than doubled in two years, and those under the age of 40 have increased by 30%.
But Sarah Coles, head of personal finance at Hargreaves Lansdown, says people should not expect interest rates to be lower if they come later to shorten the term.
“Economists are constantly changing their expectations about when the Bank of England will cut rates.
“Back in January, some of them were predicting cuts as early as March, and now we’re expecting them this summer. Even then, the cuts aren’t expected to be particularly rapid, so anyone holding their breath for much lower rates will have quite a bit on their hands.”
She suggests that those who have a mortgage loan for 35 or 40 years need not only a plan to repay it, but also a plan B for “unexpected turns” in life.
For example, if you’re moving your mortgage into retirement and expect to sell and downsize to pay off debt, you need to think about what to do if you change your mind and want to stay in your home, she says.
“It may be just what people need to make their mortgage more affordable, but they need to appreciate the wider implications.”
For homeowners like Shane, he realizes there may be some risk involved, but he considers himself lucky with the challenge.
Additional reporting by Bernadette McCaig.
Ways to make your mortgage more affordable
- Make overpayments. If you still have time for a low fixed rate deal, you may be able to pay more now to save later.
- Switch to an interest-only mortgage. This can make your monthly payments affordable, even though you won’t be paying off the debt you built up when you bought your home.
- Extend the term of your mortgage loan. A typical mortgage term is 25 years, but mortgage terms of 30 and even 40 years are now available.
Did the issues addressed in this story touch you?