I remember it so well: the existential angst, the self-doubt, the bitter railing against intergenerational inequality, all of which preoccupied me for much my twenties.
The cause? Anxiety about getting on the housing ladder.
When you’re in that desperate state, it’s all consuming. Owning your own home is the holy grail of adulthood. You imagine that if you achieve it, everything else will be alright, you will get on with the rest of your life, focus more on your career, somehow be more of a person. Flowers will grow in your garden, you’ll do things like chat to the neighbours and you will no longer be beholden to landlords, with their rent increases, reluctance to resolve broken hobs and intransigence over pet ownership. You’ll get that dog and you’ll stay in that house for YEARS, brazenly putting things up with blu tac on the walls.
Nothing else mattered in those pre-home ownership years – and actually when I was 30 and it did happen, thanks to a decent hand-out from my in-laws (given all the more urgently because of the bump I was growing), the experience matched my expectations. I loved being able to paint walls, lay turf and hammer in nails. When my first son was born a matter of weeks after we moved into our first mortgaged property, I felt more secure, like I’d completed a necessary step in the check box list of parenthood.
So I get it. I get the yearning for true financial stability, housing security and a life less stressful simply because you own your own roof. Would I have also chosen to take out a mortgage on a 40-year term in order to get on the ladder? If it was the only way to afford a home, the answer is yes, you betcha.
Increasingly, it is the only way. Mortgage terms are getting longer. Last week, Moneyfacts put out some research showing that more than half of mortgages on the market are available for a term of up to 40 years.
What does this mean for borrowers? The average age of a first time buyer is now 34, which means that the end date for their first mortgage, should they take the maximum term, would be when they hit 74. The difference between 25 and 40 years is thousands of pounds of extra interest. But there’s more to it than the extra interest bill. A borrower taking out a super-long term may have had to stop working before reaching the end of their mortgage repayments, and have to rely on pension income to pay out for housing costs – something that pensions are not designed to do. That’s if they have decent enough pension income. The bind of housing costs stretching deep into old age could completely blow up any retirement prospects.
So are long terms a good thing? They are expedient in the current market, for sure; but not good.
One of the problems is that lenders tend to let borrowers determine their mortgage terms, explaining only that a longer term will cost more in interest, not so much that it might also leave them poor in old age and unable to give up work.
Brokers simply ask the question: 'When do you think you’ll retire?' before determining a valid mortgage term based on the borrower’s expectation of when they will stop working (but truthfully, mostly made up on the spot). How many people in their early thirties realistically have a clue about their eventual retirement date? I certainly didn’t. I think I answered 70.
The temptation for those desperate to own is of course to be optimistic about this date. A longer term reduces the monthly repayments, affecting the value of the house you can afford. It wasn’t because I really plan on retiring at 70 that I answered 70, it’s because I wanted the loan required for the house we wanted to be assessed as affordable. The truth is that when I hit 65, I want to be knitting, baking and taking my grandkids to the park. I don’t want to be nose to the grindstone, worrying about how to meet monthly mortgage repayments out of my meagre income. I don’t want to be scrimping and living off beans because I’ve had to use my pension savings to pay for my home loan. I want to be free to grow old and possibly suffer from some long-term health issues (reality check – healthy life expectancy is around 63) without worrying about also losing the roof over my head.
Lucky for me we were still able to opt for a 25-year term – but I understand the temptation to go for longer.
When you are young, you are hopeful. You think about your salary rises over the years, how much spare cash you will have to overpay on your mortgage, allowing you to steadily bring that term down. You assume that the house you’ve just bought will rise in value, reducing the loan-to-value limit and therefore your interest rates over time, bringing your mortgage repayments down further. But will that happen? Or will it be the case that you get used to the repayment level on the 40-year term, so that your outgoings adjust to it and you find it harder to meet your initial goal of overpaying? And will the value of that property always rise, in line with your expectations? Will you always be in work? Will your salary always be heading upwards?
Longer mortgage terms are inevitable in a market where housing is just unaffordable on normal salaries over traditional 25-year repayment periods. They are a lifeline to first-time buyers and in many cases will be exactly the right thing to do. But borrowers stretching out their terms to the max need to be honest with themselves – not to mention their brokers and lenders – about whether their plans to overpay and get the term down are realistic in the context of general life plans; about whether their retirement plans, minimal though they may be for a first-time buyer, are realistic. About whether their plans are based on an assumption that house prices will forever rise and interest rates will forever be low, and about whether the prospect of lower living standards once you are past the standard retirement age is something you are prepared to accept. Is the price of home ownership eternal debt? Not quite yet. But there’s certainly more at stake than there used to be – and more than most first-time buyers can contemplate when there’s only one thing on their minds.
Becky O’Connor is a personal finance specialist for Royal London