What is the average mortgage length? The short answer is easy: 25 years. This is the “standard” length for a mortgage product in the UK. Unless you discuss otherwise with your mortgage lender, this will be the starting length of your mortgage.
However, the way we pay our mortgages has changed rapidly over the past ten or more years, and the average mortgage length is changing. Unfortunately, as the data shows, this is not necessarily for the better. In fact, the increasing average mortgage length could be making you poorer (or at very least indicate that the nation is struggling to pay down their mortgage debt).
The good news: more people are paying by cash
An article from the Guardian website reports that the number of properties bought for cash is on the increase. This may sound like good news. More people can afford to pay for property without going into debt for it. However, the reality is probably not quite as good.
The report states that “cash buyers” were behind four in ten of property purchases in 2013. More accurately, analysis by the Intermediary Mortgage Lenders Association (Imla) found that the proportion of home purchases funded by mortgages dropped to 62% last year. This is the lowest level since 2005 when comparable data was first available.
What the article doesn’t explore is who these “cash buyers” are.
According to Savilles, foreign investors have bought about 70 percent of newly built properties across central London. Moreover, according to Knight Frank, 30 percent of luxury London homes worth 1 million pounds or more were bought by non-UK residents.
So, whilst more people are paying in cash, it seems that the majority of these are foreign investors looking for a place to store their value. Its highly like that these foreign investors are cash buyers for two reasons:
- It is very difficult for foreign investors to obtain UK mortgages
- The objective of the investment is to store wealth in a long-term asset. Therefore, it is unlikely that the purchases are being funded by debt.
What about the rest of us?
The extremes are increasing. The Office of National Statistics (ONS) recently released figures on the UK housing market in 2013, which includes details of the average mortgage length. Whilst the average length of a new mortgage is still 25 years, the figures have changed dramatically since 2000.
- Good news: In 2000, 55% of all mortgages were 25 year mortgages. By 2012, this figure had fallen by half to 27.3%.
What does this imply? Well, less people seem to be taking the “standard mortgage product”. This seems to be a positive thing as more people are thinking about their mortgage requirements more rather than just taking the package offered by the mortgage provider.
- Good news: In 2000, 11% of all mortgages were 20 year mortgages. By 2012, this figure had fallen to 7.4%.
This agrees with the conclusion above as a “20 year mortgage” is the second most popular product. People want to pay down their mortgage quicker than the standard rate, so they decide on the next lowest number.
- Good news: In 2000, 2.3% of all mortgages had less than 10 years left on the mortgage. By 2012, this figure had increased to 4.2%.
The number of people with less than 10 years left on their mortgage has almost doubled. More people seem to be paying down their mortgage quicker.
- Bad news: In 2000, 1.6% of all mortgages had 30 years or more left on the mortgage. By 2012, this figure had increased to an incredible 27.8%.
There was too much good news, wasn’t there? A substantial increase has been noted since 2000 regarding the number of people with longer than standard mortgages. The increase has actually moved the average remaining years on a mortgage from 22 years to 24 years. This means that the number of years outstanding on people’s mortgage s are very close to the standard mortgage length in the UK.
If we are looking for positives, we could say that people may be paying less on buy-to-let repayment mortgages whilst interest rates are low. Our analysis of whether it is better to buy a house with cash or a mortgage suggests that this would be a good move in the current low interest rate environment. However, this would make up a very small percentage of the market and may not even be a factor.
More problematically, the issue would seem to be due to people taking longer mortgage products in order to make their monthly mortgage payments more manageable.
Extending your mortgage beyond 25 years
Let’s look at a possible mistake that almost 28% of all mortgage holders could be making.
We are looking at a property we wish to buy. It is the “average” UK property and is worth £250,000. We put down a 20% deposit and are offered four options by our mortgage provider, for a mortgage at a fixed rate of 4%.
- 35 year mortgage – monthly payment = £1,116.20
- 30 year mortgage – monthly payment = £1,204.79
- 25 year mortgage – monthly payment = £1,333.58
- 20 year mortgage – monthly payment = £1,532.95
Well, the first option seems to be the best as I can pay up to £400 less each month, which would make it much more affordable and my life would be a lot easier.
What impact does this short-sighted decision have in the long-term? Here are the values of what you will pay back to the bank in interest:
- 35 year mortgage – total interest = £218,801.21
- 30 year mortgage – total interest = £183,725.61
- 25 year mortgage – total interest = £150,074.61
- 20 year mortgage – total interest = £117,908.80
The mortgage provide says “35 year option, sir/madam? Excellent choice” as they will earn almost double the interest over the life of the loan.
A dangerous cocktail of factors
So yes, the average mortgage length is still 25 years. However, there has been a worrying increase in the number of people taking out mortgages over a longer-term. The increase has been increasing rapidly over the short-term as well.
Between 2010 and 2012, the percentage of people with a 30 year+ mortgage increased by 46% (from 19.1% to 27.8%). This increase has undoubtedly been fueled by a dangerous combination of factors:
- The average house price has been increasing, especially in London. However, real wages (wages vs inflation) significantly fell between 2010 and 2012. Therefore, people are finding it harder to meet the monthly mortgage payments based on a shorter term mortgage.
- Mortgage rates are currently at a historic low. If people are taking a mortgage products now at historical low interest rates and they cannot afford their repayments over a 20 year mortgage, they stand little to no chance of meeting their repayment obligations when interest rates eventually do increase. In 2013, the “mortgage payment to income ratio” was 31%. In 1989, it was over 80%. Any interest in interest rates, however slight, is going to cause a serious problem to these people paying over 30+ years.
Conclusion – What does the average mortgage length mean?
There isn’t a one size fits all approach, and being under or over the average mortgage length doesn’t necessarily put you in a good or bad position.
If you wish to take advantage of low interest rates and leverage your borrowed money in the markets, then you will profit from this over the long-run. This is made clear in our article pondering whether you should buy a house with cash or a mortgage.
Equally, if you want to aggressively pay down your mortgage more quickly and get out of debt, then go for it.
However, the key danger to avoid here is taking out a longer mortgage so that you can afford the property through your monthly payments. If you work out your mortgage based on 20 or 25 years and you cannot afford the monthly repayments, the solution is not to extend to 30 or 35 years. The answer is that you need to buy a cheaper property!
I’d love to hear your thoughts. Let me know what how many years you are paying your mortgage over? What is stopping you reduce the repayment period? What offers were you given by the mortgage provider when you obtained your mortgage?