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Mortgage costs driving buyers to 35-year loans to keep payments affordable

mortgage Pedestrians walk past a row of houses in London, Britain June 3, 2015. British house prices rose at their slowest annual rate in nearly two years in May, as growth continued to moderate after double-digit increases in the middle of 2014, figures from mortgage lender Nationwide showed on Wednesday. REUTERS/Suzanne Plunkett
UK housing market is showing growing signs of stress, amid rising interest and mortgage rates. Photo: Suzanne Plunkett/Reuters (Suzanne Plunkett / reuters)

Surging mortgage rates are pushing record numbers of first-time buyers to take lengthier loans of around 30 years, in a bid to make their monthly payments more affordable.

Just under a fifth (19%) of all loans taken out by first-time buyers in March were for 35 years or longer, while more than half took a loan of over 30 years, figures from trade body UK Finance show.

This is the highest proportion since records began in 2005, and more than double the 9% rate in December 2021, when the Bank of England started raising interest rates from a low of 0.1%.

To put this into context, this compares to just 2% in 2005 when these figures were first collected.

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A customer borrowing £200,000 over 33 years at a typical market rate today would lower their monthly payment by around £143, compared to borrowing over 25 years.

Read more: UK house prices fall for first time since 2012

However, it means that over the lifetime of a mortgage they will pay significantly more interest and could be burdened with debt into their retirement. In the example above, they could pay around £50,000 more in interest over this longer term.

“In order to lower monthly payments and, thereby, improve their affordability calculations, we have seen customers increasingly take out mortgages over longer terms, an option still permitted by most lenders and within the FCA’s responsible lending rules,” UK Finance said.

The rapid increase in the last 12 months is evident too – as in March just 9% of first-time buyers were taking on mortgages lasting more than 35 years.

“Mortgage lending dropped significantly at the start of the year, although some borrowers are still stretching affordability with longer term mortgages. More recently, uncertainty around the inflation outlook has led to another bout of elevated volatility in swap markets, leading to some repricing by lenders,” Eric Leenders, managing director of personal finance at UK Finance, said:

“While this persists, we expect near term mortgage market activity to remain relatively fragile. Borrowers coming to the end of their fixed-rate deal are encouraged to seek advice from a whole-of-market broker,” he added.

UK lenders have been raising rates and pulling mortgage deals for the last couple of weeks, in a volatile and turbulent mortgage market, amid growing concerns over future interest rate rises.

Read more: UK mortgage approvals slump after interest rate hikes

Halifax Intermediaries has told brokers that it is upping fixed rates this Wednesday, which are expected to increase by 0.82 percentage points.

Meanwhile TSB has said it is hiking rates by up to 0.75%.

The latest increases come just days after almost 800 residential and buy-to-let mortgage deals were pulled by UK banks and building societies.

Meanwhile, house prices have fallen for the first time on an annual basis in 11 years amid widening concern about soaring mortgage costs.

Prices slumped 1% in the year to May, down from 0.1% growth in April, according to mortgage lender Halifax. It is the first fall since December 2012.

Monthly prices were static in May following a 0.4% fall in April, making the average home worth £286,532.

Watch: How much money do I need to buy a house?

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