How mortgages work?

The 100-year life is a phrase coming out of the near future. It signals a new longevity in just about everything and answers, particularly, to the steady crawl of life expectancy rates that have in recent times risen to new heights. Mobilised in its local politics, Japan remains the only country to adopt the theory of “century-long living as a national project”. This speaks to a wider trend that forces society to rethink how lengthier life-times might have consequences for the healthcare and finances of its citizens. Keen-eyed readers can expect headlines with similar ideas about mortgages as 40-year terms become the new norm.

Historically, residential mortgages have been taken up across 25 years. In lieu of tougher affordability rules, however, lenders have begun to increase the maximum term against loans. The Financial Times investigates how recently more than half of mortgages, or lending deals, can be “stretched” across a 40-year term.

It is partly a reaction to home-buyers wanting more out of their finances. A lengthier term against a mortgage product allows for reduced monthly payments, which makes the housing market more accessible to new prospective buyers. This addresses an old frustration of affordability for homeowners, which has since seen creative strategies ebb away at the tough rules for entry into the property market.

Longer terms, the kind that stretch, can ease the immediate financial pain of initial payments, especially where the market was hitherto closed off from these prospective buyers. Indeed, with stretched terms, financial opportunity opens up the property market to new buyers looking to build a home from their wealth. However, longer terms often result in homebuyers having to pay back more overall, so it is a good idea to talk to an adviser to determine what’s right for you.

What are the current mortgage rates?

Beyond the traditional purchase journey of a mortgage, when borrowers locked-in to short-term commitments against a property, the market now delights a wider spectrum of borrowers. The decision to purchase a mortgage, it would seem, is no longer a question of meeting tough affordability rules, but a matter of comparing the flexibility of longer terms with interest rates.

According to expert financier Darren Cook at Moneyfacts, the market is full of “near record lows” when it comes to mortgage interest rates. Essentially, prospective homebuyers are discovering alternative means of repaying home loans that stretch across longer periods of time. The homebuyer is presented with two strategies: on the one hand, extending the length of your loan opens up immediate opportunity to plan more flexibly with your finances; on the other hand, interest rates against shorter terms can often be kinder to your overall wealth.

Certainly, scepticism has slowed the enthusiasm for longer terms, where it is natural, if healthy, for homeowners to research their options. Likewise, certain borrowers, especially first-time buyers, find opportunity ripens with this kind of flexible financial planning.

A renaissance or exercise resistance?

For some, longer terms equate to new financial freedoms in the way they manage their monthly outgoings; whereas others may opt to shrink their interest with a shorter period of commitment. As a general strategy, financial planning should answer to the individual goals of each borrower. That means returning ownership to homebuyers, both new and returning to the market, and by empowering them to make both sensible and prudent financial choices.

There are reports of lenders introducing a “maximum borrowing age”, which answers to the growing sense that loans of this scale are near-lifelong endeavours. This is similar to Japan’s transitional economic landscape, where the financial wellbeing of its citizens is responding to new life challenges. As a thought exercise, Japan’s 100-year life is a reminder that times are indeed changing.

 


GLOSSARY:

  • mortgage term

The length of time against your loan is called a ‘term’.

  • maximum borrowing age

Similar to a term, this is a measurement of age against the borrower.

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