What's so bad about a 30-year mortgage?

24 October 2011

I don't understand all the fuss about 30-year mortgages. I honestly don't see what, in principle, is wrong with lenders offering longer-stretch mortgages - 30, 40, even 100-year terms, if necessary.

They have been on the market before but there was, according to the Building Societies Association, no real demand for them and so they were pulled. But there are substantial potential advantages, it seems to me.

There is a natural reluctance within the Great British Homebuyer to spend their lives in hock to a lender, they would rather be mortgage-free. Freedom from debt is their goal, so they go for the shorter-term mortgage.

While being debt-free is a perfectly noble life ambition there is a great deal of difference between good debt - like a mortgage backed by a concrete asset - and bad debt, like an unauthorised overdraft.

A mortgage is the cheapest form of borrowing you can get and as long as the repayments are reachable and affordable, it's the healthiest form of debt there is.

The average life of a mortgage, according to the Council of Mortgage Lenders, is about nine years. This is because homeowners climb the property ladder as their lives change - with better-paying jobs, expanding families, the odd windfall and so on. The old mortgages are redeemed and new taken on. It therefore doesn't really matter if a mortgage is the orthodox 25-year or 30, or 40.

When you are selecting a mortgage to buy a home you do so very largely on the grounds of affordability. There are other things to consider among the myriad of products on the market, fixed-rates, trackers, capped rates and so on, but it all comes down to your ability to repay.

The huge and growing problems of first-time buyers are a matter of prolific record, the biggest of those problems is the increasing difficulty of accessing enough lending to acquire a property.

Understanding that a 30-year term will not make the most efficient redemption in the long run is fine if it is balanced by lower monthly repayments, which flatten the burden in the early years when homebuyers (all of them - whatever the deal) are stretched.

Of course, this relies on the price of the underlying property being projected to grow in the long term. Historically, it is more than likely to do so, even if the current credit squeeze is forcing lenders to offer poor deals and the housing market is relatively stagnant.

But a rising property market relies on the free availability of credit in the wholesale markets so that lenders can offer the best deals and encourage home ownership. They want to lend as much as we want to borrow.

It seems to me that a longer-term deal - without punitive lock-ins or redemption penalties - may help both sides put more liquidity in the property market. We all want to see steady and controlled house-price inflation but we also want to give a chance to the fresh blood which gives life to the market.

At the other end of the timescale too, it seems to me there are potential advantages. In Japan - an even more overcrowded island than this one - in the 1980s and 1990s property was totally unobtainable for almost all the working population. Longer-term mortgages of up to 100 years were commonplace. Children would inherit a debt, sure, but they would inherit a lot of equity too - so is that, in itself, such a bad thing? That was the theory anyway. They are common in Switzerland too, where property prices are extremely high.

I'm not suggesting for a moment our market should slavishly follow either the Japanese or Swiss examples, but it does mean there is a precedent from which we can learn and develop.

The UK mortgage lending industry is, and always has been, the world leader in bringing the dream of homeownership to its citizens.

Of course this won't be right for everyone - but to me longer-term mortgages certainly have a place in the market - and longer-term mortgages may well be the right answer for many people and indeed for the market itself.