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As house prices rocket, more buyers in their 30s and 40s are being forced to take out mortgages over a 40-year term, rather than the traditional 25 years, to keep repayments affordable. Six in 10 home loans now offer buyers the option of a 40-year term, according to Moneyfacts. However with the average first-time buyer now 34, such deals could run into their 70s. Halifax, Barclays, Santander and Nationwide all now offer 40-year terms, while NatWest and Virgin Money stretch to 35 years.
Lengthening the term on a standard capital repayment mortgage cuts costs and provides breathing space, but at a price, said David Hollingworth, broker at L&C: “The total interest paid over the life of the mortgage will rise dramatically.”
Someone who borrows £150,000 over 25 years at 2 per cent faces repayments of £635.78 a month, but stretching their mortgage term to 40 years reduces that to £454.24, saving £181.54 a month. However because they will repay the debt over an extra 15 years, total interest charges would shoot up from £40,734 to £68,035, an extra £27,301.
Hollingworth said buyers who take out a longer mortgage term at the start of their loan should either remortgage to a shorter term at a later date, or overpay to shrink their debt: “Otherwise many could be forced to sell their property to repay the debt.”
One in six homeowners already struggle to clear their mortgage before retirement and many will never pay it down, Hargreaves Lansdown research shows. Senior personal finance analyst Sarah Coles said: “Many could be forced to work later in life than planned, sell their home or downsize.”
There will also be a surge in the number of older people renting rather than owning in retirement, new research shows. One in three private rental properties are headed by somebody aged 45 or over, and this will jump to at least half by 2035, according to analysis on behalf of Paragon Bank.
The private rented sector will be getting older as many cannot afford to buy. Amy Norman, senior researcher at the Social Market Foundation, said: “We need to revisit our preconceptions about renting being the preserve of young, mobile households.” Older renters will want different types of properties, including accessible, ground-floor homes close to shops, transport links, health services and loved ones, Norman said.
Continuing to pay rent in retirement will be a burden on their finances, especially with pension incomes already squeezed.
Rents are rising sharply and this will further squeeze pensioners who rent rather than own. Coles added: “If you rent for life, you need to consider the toll this will take on your pension and make sure you’re building up enough savings to cover it.”
Yet renters typically have fewer pension savings than homeowners, Coles warned: “It’s going to be tough for many.”
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