The Real Cost of 35-Year Mortgages
According to the BBC, “A quarter of mortgage holders aged under 30 who started their loan early this year chose a 35-year term”
In addition, the Financial Times said, “mortgage terms in excess of 35 years have become much more popular among first-time buyers in the past year. At the start of 2022, about 8 per cent of first-time buyers had a mortgage term longer than 35 years. By December — after the average mortgage rate for a five-year fix jumped from 1.6 per cent to 5.1 per cent — that proportion had more than doubled, to 17 per cent.”
For today, we want to explore the implications of these ultra marathon mortgages and what they mean for our lives not just today, but, but also for the future.
What we are effectively seeing is a trend that will have huge implications for the future.
Young people, Gen Zs, Millennials, and some of the Gen X are effectively buying houses at insane prices.
Some are even having to be forced to buy much smaller homes naturally as a result, but doing it by taking these debts for much longer periods and effectively indebted for the future.
Today, we want to unpack what this means using a real-life example, to help us really understand the numbers so we can better make more informed decisions for ourselves and our own families and households.
Generation Debt: The 35-Year Mortgage Trend
Here is a real-life example:
Kate and Adam are both 29 years old and have been saving for a house for years.
They recently bought a 3-bed house together on the outskirts of London for £400,000 with a 20% deposit. This means that they borrowed £320,000.
They did this with a mortgage rate of 5.5% and the mortgage is on a repayment basis.
Although they were aware of the traditional 25-year term for a mortgage, they chose a 35-year term because it makes their monthly payments more affordable. So they went with this option.
Why is this a problem?
Firstly, getting a mortgage today is not like the old days when the Baby Boomers borrowed much smaller amounts relative to their incomes and high inflation eroded the value of their remaining debts.
Record low interest rates over many years have driven up property prices whilst real wages have stagnated making it extremely difficult for first-time buyers of our generation to get on the property ladder.
Let’s first let’s look at the real cost of taking on ultra-long mortgages followed by solutions.
The Real Cost of 35-Year Mortgages
Here are the real costs of 35-year mortgages:
1. The Cost of Money
Using the example above, since Kate and Adam went with a mortgage term of 35 years instead of 25 years, those additional 10 years will lead to a total mortgage interest payable of £389,827.
Most people see this number in their mortgage documents and just ignore it. That 35-year term would have led to a monthly payment of £1,718 per month.
If they chose a mortgage term of 25 years, interest over the term of the mortgage (assuming all things remain equal) would have been £269,524.
A 35-year mortgage leads to a whopping £120,303 more in interest simply for making that decision to borrow over 35 years instead of 25 years for affordability.
This benefits the banks more than anyone else 💰.
The monthly payment for a 25-year term would have been £1965 per month.
So effectively, for paying £247 per month less on their mortgage, they’ll have added £120,303 in interest over the term of the mortgage all things being equal.
This happens because Compound Interest works against them more because they have a longer term and so the bank benefits even more and they’ll have to work for longer to repay that mortgage.
But it doesn’t end there.
Although the longer term of 35 years will help first-time buyers get on the ladder, it limits their ability to climb that ladder.
That’s because the longer term slows down their ability to build equity because the majority of their monthly payments will be going towards paying interest rather than capital.
Using the example mentioned earlier for Kate and Adam:
Since they chose a 35-year mortgage, 85% of their monthly payments would be going towards interest (rather than capital repayment) in the early years of their mortgage rather than 74% if they chose a 25-year mortgage.
2. The Cost To Your Well-being
It goes without saying that when you take out a long-term mortgage for 35 years and beyond, there's a natural cost because you're gonna be working for longer to pay that debt back.
But there’s also the well-being perspective i.e. what happens when your job has a threat to it or you're going to be made redundant.
People have deep fear about losing their jobs when they have mortgages, particularly when it's a huge mortgage, and the term of that mortgage is huge as well.
It piles on a massive amount of stress.
3. The Cost of Opportunity
Naturally, if more of your money is going towards paying for a mortgage, you have reduced contribution to other areas like your pensions and other areas of spending that you might have ordinarily.
If your wage is not rising as much to keep up, then you might find yourself in a trouble because you still have to pay that mortgage.
At the same time, you have the negativity around the fact that you're not saving and investing enough for retirement, which piles on the pressure as you get older.
4. The Psychological Cost
I've learned from having a mortgage myself that there is a huge psychological burden that you have when it comes to mortgage and that burden becomes bigger with a 35 year mortgage.
It just feels like you've got a massive weight on your shoulders that you cannot shift.
That psychological weight becomes so big that it actually might demotivate you from even trying to pay off that mortgage any sooner.
You see that amount of debt as just being so insanely high that it becomes almost impossible for you to act and do something else.
It also feeds into other areas of your life because you might become somebody who doesn't want to take any risks and that inability to take risk might then start to affect other areas of your life more generally.
All of this points to future problems for people who have ultra-marathon mortgages.
We wanted to share this real cost perspective so that you can be better informed when making decisions such as increasing the term of your mortgage.
We fully understand that affordability remains a huge problem, so what should people do?
Recommended Book: Financial Joy
Financial Joy is a 10-week plan to help you banish debt, grow your money and unlock Financial Freedom.
It’s written from our perspective as a millennial couple with children who overcame many challenges as immigrants to achieve Financial Independence aged 34 including mortgage-free in 7 years.
Financial Joy is a balance of wealth + well-being and it’s accessible to everyone now, not later.
Solutions To Getting a 35-Year Mortgage
Let’s now consider potential solutions if you are somebody who's trying to get on the property ladder or if you're currently a homeowner and have a long-term mortgage.
1. Wait and Don’t Buy Until You Can Afford to Buy
We recommend buying a property ideally when you can do so without paying away more than 25% of your net income before overpayments to a mortgage.
According to the BBC:
Nationwide said that someone earning an average income and purchasing the typical first-time buyer home with a 20% deposit would spend 38% of their take-home pay on their monthly mortgage payment. This is higher than the long-run average of 29%.
Save or hustle to save more to avoid spending 38% of your take-home pay on only a mortgage.
2. Buy Smaller and Cheaper Around Where You Live
Many people have no choice but to do this anyway.
I’d personally avoid flats. I just hate uncontrollable service charges among other issues with flats.
3. Relocate Abroad or Move Further Out To Buy Cheaper
This is what we did instead.
We moved out of London and bought a forever home in a commuter town in Kent and focused on paying that mortgage off fast whilst also investing in stocks.
4. Rent Instead
Renting is a legitimate option but not for everyone.
Although many will argue that having a property with 35-year mortgage is better than renting because at least you feel like you have the costs somewhat under your control.
There is also a part 2 on why you should buy a house.
5. Buy With a 35-year Mortgage and Overpay Aggressively
In the example we gave earlier, it would take making an overpayment of £247 per month to wipe off 10 years from the mortgage term from a 35-year mortgage to a 25-year mortgage.
If you were in that situation, you could raise £247 a month through a part-time job or a side hustle or simply adjusting other aspects of your lifestyle.
The key thing is to know your numbers and be close to them!
Note that we've had people explore the idea of getting a 35-year mortgage and then look to use extra they would have paid with a 25-year mortgage to invest in stocks instead.
Our experience of this is that not everyone is disciplined enough to stick to this. Soon enough, lifestyle creep catches up.
If you can get a guaranteed return by overpayment your mortgage especially as interest rates are high, do so.
6. Buy With Interest-Only and Wait For An Inheritance to Arrive.
This is a terrible option to be in and one that I would never want to find myself or my loved ones in.
The chances are, most people will not inherit anything as their parents too are struggling, so I personally wouldn’t go anywhere near this option for a residential property.
However, for a number of people, this is their only option and we fully understand and respect that.
7. Build More Homes
This is more for the government.
More housing stock is required to shift the excess demand to supply imbalance. This remains an ongoing debate.
Now more than ever is the time to make intentional decisions about housing as it has long-term implications.
Remember that the term you take out for your mortgage is not set in stone and you have the power to become debt-free faster by being intentional about mortgage overpayments.
Compound interest can work for you or against you, but knowing your numbers when it comes to your mortgage gives you one big step ahead.
What to read next on 35-year mortgages:
- Order our book: Financial Joy
- Wish I Knew This Before Getting a Mortgage
- How We Paid Off Our Mortgage In 7 Years
More to watch next on 35-year mortgages:
What are your thoughts on 35-year mortgages or ultra-marathon mortgages more generally? Comment below.