Published: 2 December 2014 | Author: Bernard Clarke
For those who still think of mortgages as synonymous with a 25-year repayment period, times really are changing.
A combination of longer working lives and affordability pressures mean that there has been a significant and fairly continuous shift on the part of households to longer-term products. But this shift is concentrated in the experience of young borrowers.
Across mortgage borrowers as a whole, the proportion of customers taking out loans with a repayment term of more than 25 years has more or less doubled over the past five years, from 16% to 32% in the third quarter of this year. Some of this undoubtedly mirrors the near-disappearance of interest-only mortgages in recent years.
Chart One: Take-up of longer term mortgages, as % of all regulated products
The degree to which borrowers rely on longer-term mortgages varies materially with age, in part reflecting the more stringent criteria relating to loans that extend into retirement years.
So far this year, for example, those aged 30 years or less account for nearly 60% of mortgages with a loan term of more than 25 years and fully three-quarters of those that are for more than 30 years.
Moving up the age range, there are many older borrowers taking out mortgages, but the terms shorten. Among those aged 31-40, 79% take out a mortgage with a term of up to 25 years, while 16% have a loan lasting between 25 and 30 years, and 5% have a term of between 30 and 35 years. But among borrowers aged 41-50, 98% have a term of up to 25 years, and 70% have a term of less than 20 years.
Older borrowers are, of course, more likely to have been home-owners in the past, and may therefore have built up equity through owner-occupation. That may leave them in the position of being able to fulfil their borrowing needs over a shorter mortgage term.
With first-time buyers typically about 10 years younger than other borrowers, there are clear differences in the levels of take-up by type of borrower.
But the underlying trend is clear in all cases.
Chart Two: Repayment terms longer than 25 years, % take-up by borrower type
Although it is early days to offer a full assessment, neither the implementation of the mortgage market review in April nor the announcement of macro-prudential actions in June appear to be significantly influencing these trends for the time being.
The latter is perhaps particularly noteworthy, given that the actions of the Financial Policy Committee are designed in part to help lean against an indefinite extension of payment terms.
While there may well be upper limits beyond which mortgage terms cannot stretch, the regional picture – although rather diverse – provides some grounds for optimism that we have not reached that point.
The unexciting inference is that lengthening payment terms simply reflect the new “facts of life” for many mortgage borrowers, but do not necessarily have implications for the short-term direction of the market.