Whilst there has been some improvement in the mortgage approval rate for first time buyers, getting the first step onto the property ladder is undoubtedly the hardest.
Even if you can demonstrate a history of good personal financial management and have a deposit that can be anywhere up to 20% of the purchase price, you may still find it difficult to get a mortgage approval.
For this reason, more first time buyers are opting to apply for forty year mortgages in order to get a mortgage approval from a bank or building society. In this blog we’re going to take a look at 40 year mortgages and their pros and cons.
How could a 40 year mortgage help me get approved
Most mortgage products are focussed on a repayment period of 15, 25 or 30 years. Although you may change your mortgage provider during this time period to take advantage of the best interest rates, a mortgage based on these timescales is designed to be amortised, that is, fully paid off in the final payment in the 15th, 25th or 30th year.
To get a mortgage paid off in a shorter period of time, it’s fairly obvious that the repayments required are going to be higher. This can be the bar to people getting on the mortgage ladder. The banks will assess your income and decide if you will be able to comfortably meet the repayments. They’ll also take into account the effects of an interest rate rise and see if you would still be able to meet the repayments.
40 year mortgages are designed for the people that the banks turn away because whilst they meet other criteria for lending like financial responsibility, their monthly income is deemed to be too low to comfortably meet the repayments. Adding a further 10 years of payments to the mortgage means lower payments during the course of the mortgage.
What are the advantages of a 40 year mortgage?
If you have previously been turned down for a mortgage of a shorter time period because it has been judged you’ll have difficulty in making the repayments, a 40 year mortgage may be for you. The extended repayment period will result in lower monthly payments. These lower monthly payments may be acceptable to the mortgage lender and may allow them to approve your housing loan.
And the disadvantages?
Extending the repayment period means that you’ll end up paying more interest on your loan. You should take serious consideration of this because the amounts of money involved can be considerable.
Paying off the loan over a longer period of time also means that you’ll build equity in your property at a slower rate. Equity is the difference between the value of your property and the amount of the mortgage that is still outstanding on it. If you’re paying a smaller amount off your mortgage each month it will take longer to build up equity in your property. However, house prices are still rising so you may find that your property continues to gain value after your purchase helping you to build some equity.
Do you want to be paying a mortgage a long way into your 60’s? For most people the answer is no. This is another serious consideration you need to make. Add 40 years to your current age and that’s how old you’ll be when you have finished paying off your mortgage. This places a lot of restrictions on your future options – early retirement being one of them.
Pay more each month than you need to
If a 40 year mortgage is the only way you can get onto the property ladder, you can help to reduce the amount of time to repay the loan and the interest that you’ll pay on it.
Just because the banks think you might not be able to sustain higher payments doesn’t actually mean that you can’t do it. If you are able to pay back more than you are required to on a monthly basis you can dramatically reduce the interest and the length of the term of your home loan.
So what now?
If you think that a 40 year mortgage could be the way that finally gets you onto the property ladder we recommend you get some advice from a bank, building society or a mortgage broker.
Banks and building societies will offer advice on mortgage products that they have to offer, whereas a mortgage broker can give you advice on mortgages from the whole of the market. In many cases the in depth knowledge of a broker can find mortgages that suit your needs that you may otherwise not have found. You can also visit our first time buyer pages to find out more about getting your first mortgage.