ARTICLE
21 January 2025

How Increasing Interest Rates Are Driving Demand For 40-Year Mortgages

LF
Lubbock Fine

Contributor

The demand for 40-year mortgages in the UK has surged by 39% amid rising interest rates and high property prices, as buyers seek lower monthly repayments. However, these longer-term loans result in significantly higher overall costs due to increased interest.
United Kingdom Finance and Banking

In the face of rising interest rates and escalating property prices, an increasing number of UK homebuyers are turning to 40-year mortgages. The total value of 40-year mortgages in the UK has surged by 39% over the past year, reaching £14.4 billion as of June 30, 2024, compared to £10.3 billion in the previous year. This significant increase highlights a trend where more homebuyers are extending their mortgage terms to make monthly payments more manageable in the current economic climate.

Rising interest rates drive demand for long-term mortgages

With interest rates rising steadily over the past two years, more homebuyers are being pushed towards these extended-term mortgages as a way to achieve lower monthly repayments. However, stretching repayments over four decades means that the total cost of a 40-year mortgage can be significantly higher. On average, buyers with 40-year mortgages end up paying 32% more in interest than those with traditional 25-year terms.

High interest rates mean that homebuyers taking on 40-year mortgages are ultimately paying back a greater amount over a longer period. This recent surge in long-term mortgages highlights a growing concern: do buyers fully understand the financial burden they're committing to in the long run?

In spite of the greater financial burden of 40-year mortgages, the number of sales of these long mortgages has risen 37% to 64,000 in 2023/24, up from 46,000 in 2022/23. The number of sales is up 213% over the past five years (at 20,000 in 2019/20) – while the total loan value has more than tripled in the past five years from just £3.9 billion in 2019/20.

The short-term appeal versus long-term financial cost

One of the primary drivers behind this trend is the ongoing house price inflation. The average UK home now costs around £330,000, according to the latest ONS data. At such high prices, many buyers are left with little flexibility in their budgets to pay down loans quickly. The eye-watering cost of buying a house today makes the lower monthly repayments of 40-year mortgages very attractive to buyers trying to get on the property ladder.

For many first-time buyers, the primary focus is on monthly affordability, rather than the total cost of the loan. The lower monthly payments of a 40-year mortgage may initially seem like a lifeline, but the added long-term interest can result in a significant financial burden. When choosing a 40-year mortgage, buyers need to consider that while they may feel financially comfortable in the short term, the ultimate cost of the loan will be far greater.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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