Are we entering the age of the marathon mortgage?

In the first weeks of the Covid-19 pandemic, the UK housing market was artificially closed down. Moving house was banned, renters were required to outstay their official tenancy agreements, landlords were prevented from commencing eviction proceedings. It must be true that abstinence breeds desire because when the market finally reopened again it boomed. House prices rose by 10 per cent a year, meaning properties in the wealthiest parts of London are now £120,000 more expensive than they were in 2020.

Given how expensive buying a house now is, it was anticipated that the number of first-time buyers would plummet in response. Yet that hasn’t happened. In 2021 the number of first-time buyers reached 408,379, a 15-year high. In 2022 the number declined slightly, but there were still 370,000 first-timers purchasing a home. With wages stalling and the cost of living crisis starting to bite, how was this possible?

Flummoxed as to why the first-time buyer market was still so buoyant, analysts began interrogating the details. Lockdowns had allowed prospective buyers to save more money towards their deposits, but there was more to it than that. First-timers were buying in large numbers because of the rise in the number being offered ultra-long mortgage deals – many taking out arrangements over 35 and even 40 years.

One of those with a 40-year mortgage is 29-year-old Lewis from Leicestershire, who bought a £240,000 property with his partner who is 28. Both will be on the cusp of their seventies by the time the term ends, but they think the risk is one worth taking.

“The short-term positives are that we have managed to fund a property that should hopefully be our forever home with enough space inside and out,” he explains. “We also achieved this with a 5 per cent deposit, meaning that we can spend a good £25,000 on renovation, as the property requires a lot of modernisation and work.”

The couple currently pay £1,200 a month on repayments but plan to overpay whenever their income allows and reduce the length of their agreement when the mortgage and interest rates reduce. But the pair also plan to have a child in the coming years and admit that there is no certainty about the cost of living in the next decade.

Lewis is not alone in playing the long game to make homeownership affordable. Daniel, 27, from Stockport, has taken out a 35-year mortgage with his partner, who is 24. They were advised by a mortgage broker that a 35-year agreement would provide the couple with better rates in the current climate where interest rates are riding high – and allow them to get on the property ladder. “Shorter mortgage periods would not have been affordable for us and we would have been renting rather than buying and limiting our future saving potential and options,” he says.

The pair are also planning repayments and other ways to reduce their anxieties about the length of the agreement.

“We are hoping to shorten the term as it does concern us to have a mortgage for this long,” Daniel says. “It is a massive commitment for that amount of time and it has surprised our relatives. It is unlikely that we’ll go through a whole 35-year period without financial worries, unemployment or health issues, so this has been on our minds.”

No wonder Daniel’s relatives are surprised: the pace of change in the mortgage market has been rapid. The shift started after the 2008 financial crisis; when the property market recovered from the impact of that recession, 30-year terms had become the norm. Just over a decade later, the Financial Times reported Financial Conduct Authority figures which showed mortgage sales above 25 years made up 66 per cent of first-time purchases in 2019, and 41 per cent of all sales. Today, two-thirds of first-time buyers have terms that go beyond 25 years; in 2006 it was just one-third.

The increase in agreements at 35 and even 40 years is a very new phenomenon, with a big increase recorded in such mortgage deals in the last few months of 2022. In February 2022, 8 per cent of all first-time buyer mortgages had a term longer than 35 years. A year later, this had risen to 18 per cent, according to the trade body UK Finance. The number of 30-35 year mortgages meanwhile also increased from 34 per cent to 38 per cent over the same period.

Neal Hudson, a residential property market analyst, spotted the trend. He believes the willingness of lenders to offer marathon mortgages is propping up the bottom of the market.

“We’ve had a big increase in mortgage rates and you would normally expect first-time buyers to be the first to be hit by that, as usually they are the buyers stretching themselves the most. But first-time buyers seem to be pretty robust. That’s partly because the rental market is so terrible, but it also looks like first-time buyers aren’t having to pay more in their monthly repayments because, although house prices haven’t come down, they are using longer mortgage terms to offset some of that pain.”

This also means that first-time buyers haven’t aged as much as press reports sometimes suggest. There are fewer buyers under the age of 25 than there were two decades ago (although the rise in the age of mandatory education and training will have also affected that), but the vast majority are still aged between 25 and 35. Even still, that means mortgage terms are taking most people up to the age that was once known as the cut-off point for retirement.

Hudson says that makes the 40-year offer “less useful” for those looking to buy their second step on the property ladder – but they are still being used for this purpose by some families.

Nicholas Mendes, a mortgage adviser with John Charcol, said his clients are being forced to stretch their budgets because property prices have increased far beyond expectations since the pandemic and the most common approach they are taking is to extend their mortgage term as far as possible.

“We have seen homeowners coming to the end of their fixed deal looking to extend, also in light of increased mortgage rates and households’ expenditure such as utility and energy costs, to help soften their monthly outgoing,” he explains. “Lenders’ attitudes have also changed, more lenders now accept applicants below a certain age to lend beyond state [retirement] age, stating the mortgage must end by the age of 75.”

Not all lenders are open with the public about the availability of these deals, but some, including Halifax, are making it a prime sell on their own website with potential customers able to use calculators to work out their repayments up to a term of 40 years – and right up to the age of 80.

Given that flexibility, seasoned buyers are considering marathon mortgages as one way to get what they need out of an increasingly strained housing market. Sabrina, 38 and based in Surrey, took out a 37-year mortgage with her husband, who is also 38, which will finish when the pair are 75. Their punt is that it’s worthwhile to reduce repayments to a level that makes living in their desired area affordable alongside family life.

“In the short term it meant we could afford a house in our desired location for good schools for our children while maintaining the life we want for our family – which is me juggling a part-time job around school hours so that I’m able to collect the children and take them to sports clubs, Brownies and music lessons. If we’d taken a shorter term, we wouldn’t have been able to afford any of those clubs and hobbies for them and I wouldn’t have been able to work part time,” she explains.

Sabrina accepts she will be working later in life as a result of this decision, but also hopes that an inheritance will help ease the pressure of housing costs in her later years. “It sounds awful to say, but I have a Boomer mum still living in a family home in a prime location and she says when she eventually dies – hopefully not any time soon! – we will inherit a portion of that which will mean we can pay off the mortgage. But of course there’s no guarantee if she needs long-term care.”

Are borrowers like Sabrina taking on too big a risk? On a personal level Hudson thinks not, but he fears for the impact on the housing market in the longer term. If terms don’t shorten, long repayment deals affect families’ ability to save for a retirement.

“The problem with it is that it becomes embedded,” he warns, “and it becomes something that you have to do rather than what people are choosing to do right now.”

If inflation drops, interest rates come down again and wages rise, then the future looks positive for the housing market – and for buyers, who will be able to overpay and shorten their mortgages with ease. If we become locked in a cycle of high price growth and interest rate rises, with buyers forced only to lend money over four decades, things may look very different.