Energy bills forcing homeowners to take out loans for longer
House buyers are struggling to take out 25-year mortgages as soaring energy bills have made it harder to pass bank affordability checks.
Borrowers are instead being forced to take out 40-year mortgages to spread the cost of their loans and make repayments affordable.
Millions of people face paying more for their energy bills than their mortgage this winter and borrowers have turned to ultra-long mortgages to reduce the monthly outgoings. The number of buyers searching for a mortgage with a term of 40 years or above has doubled in the past year to more than 10,000 a week, according to analysis by Twenty7Tec, a mortgage data firm. Borrowers have historically used loans with a 25-year term.
Longer mortgages mean smaller monthly repayments, which helps stretched borrowers pass affordability tests set by lenders. But buyers will pay substantially more over the lifetime of the mortgage because interest is owed on the loan for longer.
A borrower with a £250,000 mortgage at a rate of 3.5pc would pay £125,600 in interest over a term of 25 years. The same mortgage over a term of 40 years would cost £215,098 in interest – almost £90,000 more.
But homeowners and first-time buyers have been left with little choice amid a sharp rise in utility, food and fuel bills which has hampered their borrowing power.
Analysts at Investec bank this week increased their forecasts for the annual price cap, predicting it will reach £3,523 in October and then rise to £4,210 in January. That compares to a £1,977 cap today. Separate predictions from consultancy firm BFY group warned the average gas and electricity bill could rise to £500 per month this winter, meaning many will pay more for energy than their home.
About 30pc of borrowers pay less than £500 a month in mortgage costs according to major lender HSBC. This means across all banks millions will likely be paying more for their energy than their property.
Rising energy prices have also spooked banks and building societies into tightening their affordability rules, mortgage brokers have warned.
Imran Hussain of broker Harmony Financial Services said a growing number of borrowers had taken out longer-term mortgages to get around stricter affordability tests.
“The cost-of-living crisis has only started to take shape with lenders and many are adjusting how much customers can borrow,” he said. “If borrowing capacity continues to reduce it could see some borrowers priced out of buying a home in the short term.”
Experts warned it had become harder for both borrowers and banks to calculate how much households were spending amid soaring costs. Rising interest rates had also made it harder to take out a loan.
James Miles of The Mortgage Quarter, another broker, said: “Putting a number on monthly expenditure when applying for a mortgage is proving more difficult as it’s hard to estimate what running costs in the home will be in the near future.
“Typically I would be recommending 25- or 30-year term mortgages, but rate rises and huge increases in utility bills mean it's not uncommon to be sourcing 35 or 40 years. However, this will mean vast amounts more interest for the buyer in the long term.”
Younger buyers are most exposed to tighter affordability checks, but Chris Sykes of broker Private Finance said higher costs could also delay retirement for older homeowners.
Mr Sykes said: “We have seen an increase in the number of clients thinking about extending their mortgage term and some even extending into what ideally would have been their retirement because of escalating costs.
“Borrowers may currently think extending their mortgage to end when they are 70 rather than 65, and retire five years later, might not be that bad, but they may come to regret that decision later down the line.”
