We Brits are obsessed with the idea of owning our own home.
You only have to turn on the TV and there will be some property related buying, restoration or self-build programme on or a news item telling us how difficult it is for people to get on the housing market or how those of us that are lucky enough to have a mortgage are going to struggle with mortgage repayments when interest rates go up.
Yes, but it’s something you can call your own
Sorry to disappoint you but I’m not going to tell you anything new here, even when you’ve managed to save a deposit, find a bank to give you a mortgage offer and found the perfect house, the reality is, it won’t be yours until you’ve paid the bank back what they’ve lent you and then some.
If you’ve taken out a 25 year mortgage and bought your house in your mid-30s, you’ll be in your 60s by the time that you can actually call it your own. If you are one those that is taking out a 40 year mortgage you might even be in your 70s.
Don’t mention that fact that you’ll probably be in your late 60s or 70s before you might retire too.
This comes across as a pessimistic view, but even when you’ve paid your lender back and you then own your home you might only be able to bask in the satisfaction of this for a short while, because depending on your health, you will no doubt have to use its value to pay the £600+ a week it’s going to cost in care home fees should you need care in later life.
#1 It will take longer to own your home
If it weren’t for that fact that I lost a loved one and I was made a beneficiary to their Will my wife and I would probably be renting right now.
So I can see why taking a mortgage out over a longer term will be seen as an attractive option, your monthly repayments are less than what they would be if you had taken a 25 year mortgage and as a result your budget could get you a house that might have been out of your budget, there is also the benefit of not paying a landlord’s mortgage.
Though I can understand the reasoning behind why someone would rather take out a mortgage over a longer term, I can’t quite get my head around the long-term benefits to the borrower.
You buy a house because you want to call bricks and mortar your own, you don’t, the banks do and for 15 years longer too.
It appears on the face of it, it’s only the banks that really benefit from you taking out a longer term mortgage, which takes me to my second point.
#2 you’re going to pay more to the banks
Who really wants to give the banks more than they really deserve? Not me!
In taking out a mortgage over 40 years, this is exactly what you’re doing.
The banks aren’t doing you a favour in giving you a mortgage, though at first it might seem like it, while you’re being swept up in all the excitement of owning your own home, to them you’re a number on a spreadsheet, and they want to squeeze as much money out of you as they possibly can.
As an example, if you were to take a mortgage of £150,000, (which isn’t even close to the UK average house price of £223,257), and bagged an interest rate of 2.99% over 25 years you would be repaying the bank back roughly £213,000 that’s a staggering £63,000 in interest, equal to another house in some parts of the country.
The same mortgage over 40 years would cost you £257,000! £107,000 in interest.
You don’t have to be Carol Vorderman to work out that the numbers just don’t add up. You’ll be paying £44,000 more just for the privilege of extending your mortgage by 15 years, having the bank own it longer and paying a little less.
#3 You might not be able to put into your investments or savings
The very fact that you’ve taken out a mortgage over a longer term to enable you to buy a property would suggest that you might already be over stretching yourself and as a result might not be able to put any surplus money into a savings account or an investment portfolio.
Not important you might say, but owning a property is only the beginning. There are obviously other costs foreseen and unforeseen that you have to deal with and without a buffer you might have to go cap in hand for a repayment break or even worse, you might resort to a payday lender, which I wouldn’t recommend to anyone!
I know that this is a general assumption and not everyone will agree with, but one only based upon my own experience.
Savings and investment can seen as boring and something that can be put off tomorrow.
Therefore anything saved in paying less might be used to go on holidays and buy things you probably don’t even need. I can’t count the times in the past I’ve been asked to lend money to someone that had a small mortgage. Only for them to go on holidays or weekends away. In fact I was an enabler to their financial misfortune.
The extra £44,000 that you would have saved in taking out a 25 year mortgage could have been used to take out a stocks and shares ISA that could potentially be worth more in those 15 years. Though there are risks in investing and as a result isn’t for everyone, and you wouldn’t have had the £44,000 in hand to put it into an investment all in one go.
So what do you think?
While I hope that the three points above give you some food for thought, I know that circumstances often mean that a 40 year mortgage is sometimes the only option for some wanting to get onto the property ladder.
I’m by no means suggesting that you shouldn’t, but just weigh up all the options before you do and be sure that it’s right for you. There is always the option of overpaying your mortgage should your circumstances improve in the future and the terms of the mortgage allow.
I’d be interested to hear from those that have gone for a mortgage longer than 25 years and your reasons for doing so.
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