Friday 9 December 2016

Have you heard of the 'super-term' mortgage? First-time buyers stuck paying €100k more in interest

'Super-term' mortgages are piling on extra pain

Published 08/05/2016 | 02:30

First-time buyers are being hit by more than €100,000 in extra interest payments. Photo: Reuters
First-time buyers are being hit by more than €100,000 in extra interest payments. Photo: Reuters

First-time buyers are being hit by more than €100,000 in extra interest payments - as it emerges seven out of 10 new homeowners are opting for costly 'super-term' mortgages which can last 35 years.

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Many cash-strapped wannabe house purchasers - desperate to keep their monthly spend as low as possible - are increasingly stretching repayments over three decades.

New figures from the Real Estate Alliance show 75pc of first-time buyers now have mortgage terms of between 25 and 35 years.

Just 20pc have mortgages lasting between 20 and 25 years - and a hard-pressed minority comprising 5pc of borrowers have mortgage terms in excess of 35 years.

As the gap between the typical salary and average house price continues to widen, many young couples are tempted to push out the length of their loan for as long as possible. This can dramatically reduce the cost of monthly repayments.

But financial experts warn these long-term mortgages cost dearly in the long run.

CHALLENGE: Irish Mortgage Corporation’s Frank Conway. Photo: Mark Condren
CHALLENGE: Irish Mortgage Corporation’s Frank Conway. Photo: Mark Condren

It means that many of the current generation of house-buyers will be retired - or hovering near pension age - and still be burdened with monthly repayments.

These borrowing packages lure borrowers into a lifetime of debt, and their long-term interest bill shoots up dramatically.

This trend is also seen as a fresh blow to the so-called Generation Rent, who are struggling to get on to the property ladder as they are dogged by rising house prices coupled with strict lending rules.

And the growth of the 30-year mortgage - being pushed hard by the banks because it is so profitable for them - comes as the age of the typical buyer has sharply increased in recent years. In 2005, the average first-time buyer in Ireland was about 29 years old - however, this figure now stands at 33.

Philip Farrell, CEO of Real Estate Alliance, says one of the main deterrents for young purchasers is getting adequate access to finance. He said the average price of a three-bed 'starter home' in Dublin is currently €350,000.

He calculated that repayments for someone borrowing €280,000 - 80pc of the purchase price - over 20 years would be in the region of €1,650 per month.

But if this was changed to a 35-year mortgage, assuming a variable interest rate of 3.7pc, monthly repayments would drop to approximately €1,200.

"In this instance, they reduce their outgoings by €450 every month, which equates to a saving of €5,400 annually."

But he made it clear this is short-term gain for long-term pain.

"In contrast, a borrower who takes out such a mortgage over 20 years - instead of 35 years - will save about €110,000 in interest alone.

"Remember also, the average age of a first-time buyer is 33, so if they are getting into a 35-year mortgage, they'll be aged 68 before it's paid off."

Speaking to the Sunday Independent, he also pointed out that if somebody repays their mortgage over a shorter term, they're going to build equity much quicker.

"It makes absolute sense, if the couple can afford it, to go for as short a loan term as possible."

Property prices have increased in Dublin by 30pc over the past 18 months, he said, meaning affordability remained a "huge issue".

"The cost of housing in the capital is a huge challenge for first-time buyers at the moment. But overall the big problem is that they're not able to access finance because of the mortgage-lending rules. The price of childcare also remains a major financial headache for young couples. Therefore, it's extremely tempting to go with the longest term possible in order to save a vital few hundred euro every month.

"For the vast majority, it's a case of needs must. They can only afford to take out a mortgage if it's over 35 years. In many cases the decision is already made for them because of their circumstances.

"It should also be noted that if somebody decides to sell a property after a few years, the guy on the 20-year mortgage is much more likely to have equity built up on the their home, compared with the person on the 35-year term.

"Another reality is that worldwide property values are increasing at a quicker pace than average wages. Therefore, affordability is increasingly going to be an issue - and couples will continue to push out repayments as long as they can."

Meanwhile, Frank Conway, director of the Irish Mortgage Corporation, said the challenge for people is working out the maths and "seeing the overall cost".

"Childcare can be as much as €800 a month, and that's a major component for many young couples," he added.

In a statement, the Central Bank insisted lending institutions must adequately assess the affordability of a mortgage for the borrower.

Sunday Independent

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