Super-term mortgages of 35 years push up house prices
Published 28/05/2014 | 02:30
LENGTHY mortgages of up to 35 years are growing in popularity, in the latest sign of a raging property market in built-up areas.
Financial experts warn that these long-term mortgages push up property prices, while tying borrowers to a lifetime of debt.
Banks have been accused of maximising profits from first-time buyers by encouraging them to take out so-called “super-term” mortgages.
They take up to 35 years to repay, but because the loan is stretched out over a longer period, the monthly repayments are lower.
Super-term mortgages mean people can borrow more and this is pushing up prices, according to finance expert Frank Conway of the ‘Irish Financial Review’ and personal finance website for students, MoneyWhizz.org.
He said higher prices, partly caused by lengthy mortgages, were making it harder for younger buyers to get on the housing ladder.
Mr Conway said super-term mortgages were staging a return now that property prices were surging in urban areas.
“They have always been available and were hugely popular during the property boom. But there were few of these super-term mortgages issued in the last six years.
“Now that property is more affordable, we have a chance to get rid of these types of mortgages.”
He calculated that it was one- third cheaper to make monthly repayments on a 35-year mortgage, compared with |one taken out over 20 years.
“There is a 34pc difference between the monthly repayments on the 35-year mortgage than there is on the 20-year one.
“Borrowers who opt for a 35-year mortgage can increase their borrowing capacity significantly and push up property prices as a direct result.”
He called on the Central Bank and the Government to ban these super-term mortgages.
People in their 30s who take out a 35-year mortgage would not have it paid off until |they were well into their 60s, he said.
“If there is to be meaningful Central Bank or Government intervention in the mortgage market, it is on loan terms |where the greatest impact could be.”
Among the banks offering long-term home loans were Bank of Ireland, AIB, EBS, Ulster Bank and Permanent TSB, he said.
Mr Conway calculated that someone borrowing €200,000 over 35 years would have monthly repayments of less than €1,000. But the total interest charged over the 35 years would be almost €200,000, assuming an interest rate of 4.5pc.
The same-sized loan over 20 years will have monthly repayments of €1,265. But the total interest cost will be half of the 35-year option, at just over €100,000.
“Governments all over the world take direct action in mortgage markets, interest rate caps and many other areas of consumer lending to protect consumers; there is no reason why the Central Bank could not do the same on loan terms here,” Mr Conway said.
A spokeswoman for the Central Bank said its Consumer Protection Code contained |strong protections in relation to assessing affordability and suitability of mortgages.
“Lenders are required to assess affordability and suitability of each mortgage, over the term of that mortgage, based on the individual borrower’s circumstances,” she |said.
The Irish Banking Federation said borrowers were offered a choice by banks about how long they take to repay a mortgage.
“Different borrowers will |opt for mortgages of different term lengths, depending on what they are able to pay |in monthly repayments and what is on offer from various lenders.
“They will do this in the knowledge that the longer the term of the mortgage, the greater the cost of borrowing in the long term,” the banking body said.