Worrying rise in 30-year mortgages

Lax mortgage rules only result in higher prices – creating demand where there would have been none
House sold
The easiest way to cut the monthly mortgage bill is to spread payments over 30 years and not 25. Photograph: Matt Cardy/Getty Images

Mortgages with a 30-year lifespan are on the rise. The Office for National Statistics reveals that 23.3%, or almost a quarter, of all new mortgages are spread over three decades or more.

The 25-year mortgage has been dying since the early 1990s when it accounted for 70% of all mortgages. Today the figure is just 30%.

It's a worrying process that shows an increasing proportion of mortgage buyers opting to pay over a longer period.

After the financial crash of 2008 panicked borrowers appeared to be more debt-conscious. In 2008 and 2009 the proportion of 30-year mortgages went into decline for the first time and by 2010 accounted for 19.1% of mortgages bought in that year.

But the figures for 2011 show 23.3% of mortgage buyers stretching their repayments again over 30 or more years.

Bob Pannell, chief economist at the Council of Mortgage Lenders, says the lengthening of mortgage terms reflects the increasing cost of a mortgage.

He warns against reading too much into the figures because the move to regular remortgaging every two years and the rise of interest-only loans complicated the picture before 2007. In this environment, saying you had a 25-year or 30-year mortgage was less relevant.

However, it is still the case that monthly mortgage payments are calculated over a set period and the easiest way to cut the monthly bill is to tell the lender payments should be over 30 years and not 25 years as previously agreed.

Does this tell us that there are more people on the edge of being repossessed whose only option is to almost turn their mortgage into a rental payment it lasts so long?

Pannell says it shows that as house prices have risen and regulations become more stringent on the sale of mortgages, first-time buyers and existing home owners have decided to take longer to pay off their mortgages. It is an affordability issue. We cannot tell from the figures how many are distressed homeowners.

But there is an argument that old rules stipulating 25-year terms over which the capital is repaid should be applied even more rigorously.

The only result of lax mortgage rules is higher prices. It creates a demand where there would be none if people were told they don't have the income to cope.

If we are wiser after the worst financial crash in modern times, it should be to say no more to higher loan-to-value calculations, teaser rates that are unaffordable over the longer term and a disregard for the borrower's ability to pay in a sensible timescale.

Some people say it denies young people a mortgage and that living longer means you can take longer to pay down a mortgage.

But the affordability issue can only be resolved by higher pay and not easier credit. It is a subject Ed Miliband is trying to address, if a little cack-handedly, with his notion of pre-distribution. It means people on lower incomes get a boost from higher pay, making them able to buy a home with help. A boost from lax credit only sows the seeds of the next crisis.