The rate at which first time buyers are availing of 40-year mortgages has more than doubled in the last 12 months. This is according to new research carried out by leading mortgage broker, Irish Mortgage Corporation.
“At the beginning of 2005, the number of first time buyers availing of 40-year mortgages was negligible, however, that number has grown significantly. Today, almost one-in-five first time buyers are choosing a 40-year term.” said Frank Conway, Director with Irish Mortgage Corporation.
40-year mortgages offer first time buyers the benefit of a reduced monthly repayment. Using the example of a EUR300,000 mortgage with an interest rate of 5%, the repayment on a 30-year mortgage is EUR1,610 (before mortgage interest relief is applied). On a 40-year mortgage, the repayment is reduced by over 10% to EUR1,446, a saving of EUR164 per month.
“First time buyers choose a 40-year term in the first couple of years to keep repayments down, helping young people get a foot on the property ladder. But once their financial situation matures, they usually refinance to a shorter term. Today, first time buyers are much more likely to switch their mortgage for a shorter loan term and lower monthly repayments.
It is extremely unlikely that someone would end up paying the same mortgage for the full term of the loan, either as a result of moving home or switching lender for a better deal. Nobody actually ends up paying the same mortgage for 40-years. In fact, a first time buyer who has been paying a 40-year mortgage should arrange an independent review to assess cheaper options available to them” said Conway.
40-year mortgages are only available from a select number of mortgage providers, each with different lending criteria, making it important to get independent financial advice on which product best meets their needs. The increase in take-up since 2004 has been significant, which is detailed below;
Jan – June 2005 2.7%
July – Dec 2005 4.5%
Jan – June 2006 5.6%
July – Dec 2006 9.4%
Jan – Jun 2007 9.0%
Jul – Dec 2007 18.2%
“While the rate of take-up for 40-year mortgages has been considerable over the last 3 years, it is highly unlikely that those loans will last much more than a few years. The cost difference (in total interest payable) between a 40-year mortgage and a 30-year mortgage is about EUR114,000 (based on the example provided) so it pays first time buyers to refinance to a shorter loan term. Irish homeowners are becoming less loyal to their bank and increasingly loyal to their own personal financial gain by refinancing existing mortgages for better offers” said Conway.
Of those who avail of a 40-year term mortgage, only 4% combine it with a 100% mortgage.
Irish House Industry survey says about 40,000 apartments in Dublin are vacant
