Pros and Cons of a 40 Year Mortgage

Everyone dreams of owning their own home, and a 40 year mortgage can help to turn the dream into a reality. However, as with all financial arrangements, it’s important to check out all the implications before you sign on that dotted line. If you don’t maintain the repayments, you could lose both your home and your credit rating, so take the time and trouble to ensure that a 40 year mortgage is the right product for you and your indvidual circumstances..

There is a school of thought that reasons that  if you cannot afford a 20, 25 or 30 year mortgage, then you cannot afford to buy a home at all. However, if you bear in mind the pros and cons of a 40 year mortgage, it’s possible to make it work to your advantage. First the good news:

The most obvious advantage of a 40 year mortgage is that payments will be lower, and that could mean the difference between getting a first foot on the property ladder and having to wait a few more years before owning your own home. While the difference in payments may not be significant, if you’re on a tight budget, every little helps.

After five years, when you may be in a better financial position, it’s possible to refinance your mortgage after the initial fixed rate, low interest period. It’s also a safer option than an interest-only mortgage, where it’s possible to enter negative equity – the unwelcome situation where you owe more to your mortgage lender than your property is worth.

This point highlights the main disadvantage of the 40 year mortgage. The extended term means you will be paying a lot more interest in addition to the capital you repay, making the actual cost of the property much higher. And lenders will usually add a premium to the interest rate, as a 40 year loan carries more risk that they may not recoup their lendings, it’s a more expensive way to buy property than with the traditional, shorter term mortgages.

When it comes to mortgage repayment, the usual method is to pay back interest first, so it can be a number of years before you actually begin to repay the capital you borrowed. With an extended term mortgage, it will take much longer to build up equity in your home, so if average house prices are low, you could find yourself in negative equity.

Lenders – who after all, hope to get their money back with interest at some point – may require that you take out expensive mortgage protection insurance as a condition of the advance. Figures demonstrate that it can take twice as long with a 40 year mortgage to reach a stage where you have repaid 20% of the equity in your home, particularly if you paid a low initial deposit.*

Another drawback to consider with a 40 year mortgage is age – both your age now, and your age when the mortgage is finally redeemed, if you carry it to its full term. Assuming you’re in your late twenties or early thirties when the mortgage begins, you could still be paying for your house as you enter your seventies, which means you’ll have less disposable income for your retirement. It may seem a long way off now, but it has to be taken into account when you decide if a 40 year mortgage is right for you.

In summary, a 40 year mortgage is a good choice as a relatively short term option to enable you to buy your house as soon as possible. However, it should not be viewed as a long term financial strategy. Consider refinancing the mortgage after five years, and certainly no more than ten, otherwise the cons of a 40 year mortgage are likely to outweigh the pros.

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