COULD A LONGER MORTGAGE MEAN IT’S TIME TO BUY NOW?

Monday October 16, 2023

Managing Mortgage Payments in the Era of Marathon Mortgages

As persistently high mortgage rates continue to challenge homeowners, various strategies are emerging to effectively manage mortgage payments. Borrowers are exploring options such as extending mortgage terms and switching to interest-only arrangements, with a significant 25% of young homeowners opting for mortgage terms exceeding 35 years. While these choices have their drawbacks, alternative approaches are crucial for financial stability.

Navigating the High Mortgage Rate Landscape

The trajectory of mortgage rates, which has been on an upward swing since early 2022, is placing a significant burden on homeowners. Currently, the average two-year fixed rate stands at approximately 6.47%, while five-year fixed rates remain at 5.97%. This is according to data from Moneyfacts. Consequently, homeowners who choose to remortgage after their fixed-rate period expires may face substantial increases in their monthly mortgage payments. First-time buyers, too, must recalibrate their budgets to accommodate these higher costs compared to their initial expectations.

Diverse Strategies for Managing Mortgage Costs

Borrowers are adopting a range of strategies to mitigate the impact of these elevated costs. According to KPMG’s latest Consumer Pulse survey:

**18% of mortgage holders have dipped into their savings to reduce their outstanding mortgage balances.
16% have transitioned to interest-only mortgages.
12% have extended their mortgage terms.
8% have downsized to more affordable housing options.

The survey also highlights a concerning trend, with 11% of respondents admitting to reducing pension contributions to cope with increased mortgage expenses. Another 20% are considering a similar move, which could lead to reduced retirement income.

Mortgage brokers emphasize the challenge faced by homeowners, with one stating, “The cost of living and rising interest rates has made life all the more difficult for aspiring buyers and existing homeowners alike. The rapid increase in mortgage rates from the historic lows of only a couple of years ago means that borrowers are facing much higher mortgage costs. Affordability is, therefore, under fire.”

The Rise of “Marathon Mortgages”

One striking trend in the mortgage market is the increasing preference for “marathon mortgages,” which feature repayment terms exceeding 35 years, well beyond the conventional 25-year term. Data from credit reference agency Experian reveals that 25% of homeowners under 30 are now choosing mortgages with terms of 35 years or more, a significant increase from the 10% recorded in 2020.

However, it’s essential to recognize the financial trade-offs associated with these extended mortgage terms. Experts caution that there’s a price to pay due to substantially increased interest over the life of the loan. Shifting to a longer term could add tens of thousands of pounds in interest.

For instance, consider a £200,000 mortgage over 25 years at 5% interest, which would cost £1,169 per month, with total interest amounting to £150,754. Extending the term to 35 years would decrease the monthly payment but significantly increase the total interest. Some borrowers have chosen to overpay on their extended mortgage terms, reducing overall interest costs while maintaining manageable monthly payments.

Alternative Approaches for Affordable Mortgages

While some strategies come with significant downsides, alternative options can provide more sustainable solutions for managing mortgage costs. Experts suggest starting by exploring better mortgage deals as the current mortgage deal approaches its end. Having an alternative option ready can prevent transitioning to a lender’s high standard variable rate.

Additionally, if your financial situation allows and your mortgage agreement permits, consider making overpayments while on a relatively low fixed rate. This strategy keeps your mortgage balance as low as possible, making it more manageable when you need to remortgage at a higher rate.

In an ever-changing housing market marked by fluctuating interest rates and rising costs, homeowners must adapt and make informed decisions about managing their mortgages. Whether opting for marathon mortgages or alternative strategies, the key is to find a balance between affordability and long-term financial security.

Marathon Mortgages: Easing Mortgage Payments in a High-Rate Environment

Amidst soaring interest rates, the prevalence of homeowners choosing mortgage terms exceeding 35 years is reaching record highs. This trend is a response to the continually rising property prices and interest rates, which are making homeownership increasingly challenging for many.

A growing number of first-time buyers are embracing “marathon mortgages” to secure a foothold on the property ladder. Some lenders now offer terms of up to 40 years, aiming to balance the surge in living costs with still-elevated property prices. However, this trend has raised concerns about the long-term financial implications and whether it’s merely postponing financial difficulties.

The adoption of marathon mortgages isn’t limited to first-time buyers. More than one in five homeowners in the pre-retirement age bracket of 55-65 still carry active mortgages, and astonishingly, six percent of retirees are still making mortgage payments.

Experts emphasize the importance of having a clear plan in place when borrowers approach retirement age, particularly if they have opted for extended mortgage terms. Discussing how they intend to pay off the loan and the potential impact on their retirement income is crucial.

In conclusion, borrowers are actively seeking ways to manage mortgage payments in an environment of high interest rates. While marathon mortgages have become increasingly popular, they come with financial implications that must be carefully considered. It’s essential for individuals to evaluate the pros and cons of extended mortgage terms and explore alternative strategies to ensure their financial well-being both now and in the future. Balancing the desire for homeownership with prudent financial planning remains a challenge, but with careful consideration and sound advice, homeowners can navigate these turbulent financial waters and find a path that suits their unique circumstances.