The rise of the 40-year mortgage

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BBC News has reported that sales of long-term mortgages of 35 to 40 years are at record levels, and this is costing people tens of thousands of pounds in extra interest payments.

Back in 2001, most mortgages were for 25 years, but just 15 years later, 60% of mortgages are for 35 to 40 years. As house prices rise, the attraction of a long-term mortgage is that they reduce the monthly payments. First-time buyers often find that 35- or 40-year mortgages are the only way they can afford to enter the housing market.

The monthly payments for a £300,000 house are about £948 on a 25-year mortgage, but this reduces to £716 for a 40-year equivalent. This saving of £232 a month can make a huge difference to people on more modest salaries.

The problem with extending a mortgage is the amount of extra interest that is paid. Interest on a £300,000 house over 25 years is about £84,000, but that increases to £144,000 over 40 years. Some borrowers may find that they are still paying off their mortgages after the age of 70.

Rules about how much lenders will lend against a buyer’s salary have been tightened in recent years, but there are no regulations about the length of a mortgage.

When a homeowner’s income rises, the mortgage can be reviewed and the period reduced by making higher monthly payments. This can make considerable savings in the total interest paid throughout the term of the mortgage.

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