The traditional mortgage in the UK was a 25 year mortgate, in which the building society lent three times the borrowers income. However times are quickly changing. Double digit house price inflation during the past 10 years has meant the house price to earnings ratio has increase faster than the rate of inflation. The historical average in the UK has been a house price – earnings ratio of 3.5 (Average House price 3.5 times average earnings). However in 2006 this house price to average earning ratio has increased to nearly 6.0.
The effect of this is that for first time buyers if they are able to get a mortgage they are likely to be borrowing up to 5 or 6 times there income. This means that mortgage payments will be a very high % of their income. This makes new homeowners particularly sensitive to changes in the interest rate. For example the recent rise in interest rates (Nov 8th ) meant homeowners say a rise in their mortgage payments. It is likely that interest rates are likely to keep rising in the UK because of persistently high house price inflation and high levels of borrowing. However this could lead many homeowners, especially first time buyers, in danger of failing to keep up with mortgage payments. And therefore are in danger of having their home repossessed. Some people argue 50 year old mortgages are bad because it means you will be paying mortgage payments when you are retired. However a 50 year old mortgage is much better than the alternative of not being able to buy or keep up with the mortgage payments.
Firstly it is important to remember that mortgages become easier to pay back the longer you have a mortgage. This is because apart from fluctuations in the interest rate, interest payments are fixed. Therefore so long as real wages rise. Mortgage payments will be a smaller % of income in the future. For example a monthly mortgage payment of £700 sounds a lot but in 40 years time the real value of £700 will be much lower assuming moderate inflation and real wage growth.
Getting a 50 year mortgage means that your monthly repayments will be smaller making mortgage payments easier to meet.
The cost of renting a house will however rise with inflation, or possibly more than inflation. This means that if you continue to rent rather than get a mortgage. The in your retirement the real cost of renting will be much higher than the cost of mortgaging.
There is an old saying that renting is dead money. This is quite true with a mortgage you are at least partly contributing to aquiring wealth. Home ownership is very valuable in the future if you need to re mortgage or get a loan against the value of your house.
It is true that the longer you borrow the more interest you pay, but if your financial circumstances change in 20 years, you would be able to transfer your mortgage to another deal which lets you pay off some of the equity.
Basically in conclusion despite rising house prices and house prices rising much faster than the growth in real wages it is still desirable to buy a house and get on the property ladder if at all possible. 50 year mortgages make this possible for those struggling to meet the monthly mortgage repayments on the standard mortgage.