Why A 35-year Mortgage Will Become Normal In The Coming Years

The dream of owning their own home is alive and well among tenants in the UK. But new homeowners will be taking out long-term mortgage.

Official figures from the Department for Communities and Local Government suggest the decline in home ownership in England has come to a halt. But Wimbledon-based estate and letting agent Robert Holmes & Co says the London rental market will remain strong.

Of the 22.5 million households in England, the DCLG’s latest English Housing Survey reveals that 64% are owner-occupiers – the same figure as in 2013/14, but still down on the high of 71% in 2003.

This contrasts sharply with home ownership data from other countries in Europe. According to official EU statistics, 52.4% of residents in Germany were owner-occupiers in 2014.

However, anecdotal evidence points to about 90% of residents in Berlin living in rental homes. This figure falls to 80% in Hamburg, while in prosperous states like Saarland and Rhineland-Palatinate home ownership is almost 60% – the highest in Germany.

This compares with figures from the annual Generation Rent survey by mortgage lender Halifax that reveals just 45% of UK residents aged between 20 and 45 had bought their own home at the time the research was carried out in 2014.

But the reason why a high percentage of German residents are happy to be tenants is very different for the rise of Generation Rent in the UK, says rent guarantee specialist Assetgrove.

Most tenancies in Germany have an unlimited length, which means a landlord can only terminate it by evicting the tenant through the courts or giving at least three months’ notice. This notice can be contested by the tenant and will usually only be accepted where the landlord has a good reason for the notice being given.

Some cities, including Berlin, also have strict limits on the amount that a rent can be increased over a given period.

On the other hand, North London-based estate and letting agent Paramount Properties says many younger tenants in the UK, and London in particular, rent because their salaries are not high enough to save for a deposit on a first-time property purchase or secure a 25-year mortgage.

This explains why Halifax’s latest Generation Rent survey reveals a slight increase in the proportion of tenants aged between 25 and 40 who say they don’t want to own a home of their own.

However, many people who are stepping on the housing ladder for the first time are fulfilling their dreams of home ownership by taking out mortgages with far longer terms than the traditional 25 years.

A growing number of lenders are now offering mortgage terms of 30, 35 and even 40 years.

According to Halifax, more than 25% of first-time buyers took a mortgage with a 35-year term in 2015, an increase from 16% in 2007.

The main appeal of a longer-term mortgage is the drop in the required monthly payment on a repayment mortgage, but there is a cost.

Reducing the mortgage balance over a longer period, and therefore at a slower rate, means that tens of thousands of pounds more in interest will be repayable over the life of the loan.

But with property prices increasing year-on-year, the value of a property in 20, 30 or even 40 years’ time will far outweigh the amount of extra interest paid.

New research reveals that if property prices continue to rise at an average of 6.7% a year, the cost of an average home in the UK will be almost £1.3m in 2038 compared with just short of £200,000 today.