50 Year Mortgages
Traditional mortgages are for between 15 and 25 years. Obviously a 50 year mortgage drags the repayments out for 50 years which make the monthly repayments more affordable (than say a 25 year mortgage) but then the interest bill and hence total amount repayable will be considerably higher. 50 years maybe a little extreme so many first time borrowers are looking to add say 5-10 years to standard mortgage to create a 30-35 year.
There are really no hard and fast rules as to how many years are in a mortgage (max 50 years) so in effect a mortgage broker would most probably be able to secure a 37 year mortgage if needed.
Some Rough Repayment Figures
Take the assumption that the interest rate is at a steady 4.5%, these are the following monthly payments on a £100,000 repayment mortgage -
- 25 years - £555
- 30 years - £507
- 40 years - 450
- 50 years - £420
So a 50 year mortgage means a reduction of £135 (24%) in monthly payments. BUT that is only one side of the coin, the good news. The bad news is the total amount payable on the loan -
- Total interest on a £100,000 mortgage over 25 years (4.5% interest rate) comes to around £67,000
- Total interest on the 50 year mortgage comes in at over £150,000 a 124% increase
Many though use a 50 year mortgage as a stop gap in the short term. For example, they feel that their financial situation at present can't support the monthly payments on a 25 year mortgage but they'll be on a much higher salary in say 5 years. So when more money is available they'll look to refinance the 50 year mortgage into a 25 or even 20 year one. Or they may well keep the 50 year and start making serious overpayments, perhaps paying double the minimum payment per month. Both of these strategies would work well.
Interest Only Mortgages
These are simple to understand. With a traditional repayment mortgage the monthly payment is made up of part interest and part repayment of the loan principal. If the mortgage lasts for 25 years and the monthly payment is made every month then at the end of the period the original amount borrowed will be paid off in full.
But an interest only mortgage is just that, the monthly payment only covers the interest, no repayment is made on the original loan. If you were to borrow £100,000 with an interest only mortgage at make the monthly payments then after 25 years you would still owe the original £100,000. However, it is important to note that inflation will be working in your favour, in that £100,000 in today's money won't have the same power as £100k in 25 years.
Repayment Mortgage Figures Versus Interest Only
Take the assumption that the interest rate stays at a steady 4.5% and the mortgage amount is £100,000 over 25 years
- Repayment Mortgage - monthly payments of around £555
- Interest Only mortgage - monthly repayments of around £370, a saving of £185 a month or 33%
A Common Problem With Both 50 Year & Interest Only Mortgages
We all know how easy it is to financially plan for the future but then things have a habit of never working out as thought. For example, we work out that we can afford £400 a month on a 50 year or interest only mortgage but 'in 5 years we'll be earning enough money to refinance the mortgage over 25 years' or 'we'll put some money away every month into a savings account to help repay part of the loan etc'.
And this is just the sort of problem that many who take out these reduced monthly payment mortgages face. Whatever happens in the future it more than often seems to be an uphill struggle to find the extra money, pay it regularly into a savings account or find extra money out of a pay packet etc.
This therefore is a concern that must be well thought out in the beginning of the whole mortgage application process. Just how are you going to find that extra money, get that pay increase, save money on other household bills or expenditure etc.
Two suggestions we'd give here -
- Start getting financially organised, work out a monthly budget for everything, figure out now if there's any excess money that can be saved and above all find 1-2 hours a month to sit down and revue your financial situation. Take it from the author just how effective this strategy can be (especially the monthly review)
- Employ a mortgage broker or at least consult one. Some brokers charge while others take their fees from the actual mortgage lender who provides the deal. By using a mortgage broker not only will he likely have access to some of the best deals but he'll be familiar with similar people in similar financial positions, ie struggling to get on the property ladder - See this LearnMoney article - Why you should always use a mortgage broker
Summary
With some thought, research, advice and financial application from yourself there are plenty of ways for first time buyers to struggle onto the property ladder. But make sure you understand the products your buying and more importantly the financial implications of these very long term and interest only loans.
Good luck with your mortgage and don't forget that monthly personal financial review!
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