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Council of Mortgage Lenders
Mortgage Market Review
Financial Planning Committee
According to new data from the Council of Mortgage Lenders (CML), 20% of the 148,000 borrowers who took out a new mortgage in the first quarter of 2014 stretched out the mortgage term over 30 years, compared with just 4.5% of borrowers 10 years ago. More than 25% of first time buyers also took out mortgages with 30 year terms against 20% before the financial crisis, as part of what experts consider to be a worrying trend.
The statistics suggest that people are increasingly facing a lifetime of debt just to enable them to buy their first home or move up the property ladder. The reason many cite for taking out loans longer than the traditional 25 years is to lower their monthly payments and cope with surging house prices which are rising faster than average earnings.
It is likely that the popularity of longer loans will increase in the wake of tough new rules introduced last month focusing on affordability and responsible lending. The upside may be lower repayments but the downside would be reduced affordability should house prices begin to fall or interest rates increase, particularly if people have borrowed to their maximum potential in the first place.
The CML reports that the popularity for longer term loans was not restricted to new mortgages with the number of households re-mortgaging their homes with a loan that would not be fully repaid within 30 years at 5% - close to a record high in the first quarter of this year.
A spokesman at the CML said: “With house prices currently rising faster than incomes, affordability is still a stretch for those wishing to enter the market – even with low interest rates. Given the fact that many households will have worked hard to save for a deposit, it isn’t surprising that households may choose to take out a mortgage with a longer term to cushion the cost of monthly payments at the outset – especially as interest-only mortgages are no longer being widely used now that the new affordability rules flowing from the Mortgage Market Review are in place.”
David Hollingworth, associate director at London & Country, Britain’s largest independent mortgage broker commented: “If 30 or 35-year mortgages do become the norm, it will mean borrowers are paying down the debt much more slowly. That means when you make your next move up the ladder you’ll need to restructure the debt over a longer term as well. Ultimately, many people may be borrowing for life.”
The main concern is that increasing numbers of borrowers will become vulnerable once interest rates start to rise and that the risk is not worth the advantage of reducing the initial outlay for a home with longer term lending.
On 17th June, the Financial Planning Committee are likely to recommend a further tightening of rules, such as forcing borrowers to raise larger deposits or capping mortgage term lengths in an attempt to prevent unsustainable borrowing.
On one hand it is a positive approach to make home purchase more affordable but when the associated risk is sufficient to threaten future financial security, it fails to correctly define the term ‘responsible lending’.
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