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Loanliness of long-distance runner

For some borrowers, longer-term mortgages represent the easiest way of making the leap on to or up the property ladder.

The continuing rise in house prices is forcing many potential borrowers to consider their options. Such borrowers include the first-time buyer who is keen to get on to the housing ladder but has only a small deposit. They are witnessing property price escalation month by month. Others are having difficulties in meeting bigger monthly repayments as a result of stretching themselves to afford higher-value properties.

The common denominator for all is how to make their monthly payments as affordable as possible.

One simple way of achieving this is to stretch the term of the mortgage and we have seen recent fevered press speculation about the possibility of the 40-year or 50-year mortgage becoming commonplace in the UK, as is the case in countries such as Japan.

On the face of it, this looks like a sensible move for some borrowers, who would see monthly payments decrease over the longer period, as well as lenders, which would benefit from higher total interest payments as a result of the longer repayment period.

However, before we see the 50-year mortgage becoming the norm, there are a number of factors to consider for lenders, brokers and borrowers alike. First, it remains to be seen whether sufficient numbers of lenders will decide to design and market the longer-term mortgage. The fact that people are living and working longer could mean that loan terms of up to 50 years are not viewed with alarm by a generation that is happy to carry a high level of debt. In this respect, lenders will be responding to consumer demand for products that allow lower monthly repayment levels.

Second, the notion of longer-term mortgage thinking is not really a new one. One only has to consider the extensive rise in remortgaging activity to realise that borrowers have no problem in taking on a 25-year loan, then redeeming it after a small number of years and remortgaging with another 25-year product, probably at a more competitive rate. The effect of such action is that the overall mortgage term exceeds the original 25-year term in many cases.

On the other side of the coin is the apparent appetite of the public to want to pay off their mortgage earlier than the original term. A number of consumer surveys have shown that, for many people, the ability to pay off a mortgage early is of paramount importance. To that end, we are seeing the increasing popularity of the flexible mortgage, which offers overpayment facilities that will ultimately reduce the term of the loan. Could it be argued that demand for 50-year loans could well be modest for this reason? When it comes to long-term financial commitments of this type, mortgage advisers should always point out the disadvantages that need to be considered, along with the advantages.

In the case of the 50-year mortgage, retirement age comes sharply into focus. Borrowers still having a sizeable mortgage debt to repay when they reach retirement age is a real issue. With state pensions under threat as too few workers contribute to support a vastly increased retired population, equity-release schemes have been suggested as a source of income in retirement. If the property in question is still being paid for, then this option is reduced.

Linked to this point, there is still a widespread desire to pass on property to children in the will. If the property is still mortgaged, then the deceased parent will be passing on not just an asset but a liability as well. This is worth bearing in mind.

A second major disadvantage with long-term mortgage products is the need to keep making payments for an extended period. As personal pensions are in many cases woefully underprovided for, few people will be able to meet mortgage payment commitments into retirement years on drastically reduced incomes.

Finally, where an interest-only mortgage has been chosen, careful consideration must be given to the repayment vehicle. There has been plenty of publicity concerning endowment policies showing shortfalls that need to be made good. With extended mortgage terms, this sort of situation could worsen unless closely monitored.

Like all mortgage decisions, the most important factor is what is important to the borrower and it is plain to see that monthly repayment levels are critical. It could be argued that some borrowers will not be put off by the 50-year lifespan of a mortgage but will instead see it purely as a way of getting on to or moving up the property ladder. In such circumstances, they will probably not view the 50-year mortgage as a millstone but more a means to an end.

Maybe the ideal solution here is one of enhancing consumer choice. For some borrowers, combining the lower repayment benefits of a 50-year mortgage with the many features built into current flexible mortgages could prove attractive. Lenders must decide on the level of demand and potential product profitability and the borrower must decide on what is right for their circumstances.

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