There are two ways people can make their resources go further when buying a home.
One is to increase the loan-to-value (LTV) ratio and hence increase the amount available to buy a house for a given deposit.
The other is to lengthen the term over which the mortgage is repaid, which increases the size of loan associated with a given level of monthly repayments.
For example, consider someone with £2,000 a month available to spend on a mortgage. At an interest rate of 4.5%, they are able to afford a loan of £360k on a traditional 25-year repayment mortgage.
However, by paying the same monthly amount over 35 years rather than 25 years, the person could borrow £63k more.
The chart shows how in the financial crisis of 2008/9, high LTV (>90%) lending fell sharply as lenders tightened credit criteria, with only a small rise in the proportion of longer mortgages. But then over the next four years, there were virtually no new high LTV mortgages, but a marked rise in longer term mortgages. Since 2013, both LTV and term have expanded.
Although this trend towards longer-term mortgages might seem extreme, in countries like Sweden and Japan, ultra-long mortgage terms of up to 100 years are the norm.
Sachin Galaiya works in the Bank’s Retail Credit Risk Team.
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