Why is a Mortgage term usually 25 years?

Martinslovechild

I read this article from Yahoo! Finance which suggests that the current trend now appears to be a 15-year mortgage term, rather than 25-years.

I was wondering, however - where did the 25-year term originally come from?

And why don't Banks/Building Societies look at affordability and determine the loan duration on this basis? (e.g. somebody with a large disposable income may be able to pay off a loan within 10-15 years, so why don't they tell people this?).

Of course, I know that they're simply looking after their profits - it's not in their interests to sell ideas that potentially reduce their profits, but on the flip side, once the loan's paid off, they'll be able to sell you other investment products given that you're the proud owner of a mortgage-free salary.

So - does anybody know where the 25-year term comes from?

thaylock

I don't know where the 25 year term camer from, but it appears to be the standard term set by mortgage companies, possibly because it gives the borrower affordable monthly repayments during that term, or maybe it's because the longer the term, the more interest (profits) the lender collects. Personally I don't think the term matters that much, I paid a 25 mortgage off in 6 years so who cares about the term. Careful financial planning & choosing the most suitable mortgage product could mean that for the average person the mortgage could be paid off in half the time (i.e. by making lump sum during the term or doubling the monthly repayments).
But people maybe thinking that not everyone can achieve this, my answer is cut back on lifes luxuries, do you really need that nice wide screen TV, the holidays, nice new car, e.t.c, I think not. People will always get what they want, not what they need - they should learn about the priniciple of delayed gratification !
Sorry about the rant.

westernpromise

Careful financial planning & choosing the most suitable mortgage product could mean that for the average person the mortgage could be paid off in half the time (i.e. by making lump sum during the term or doubling the monthly repayments).

I reckon in a few years, we'll start to hear people complaining that they remortgaged every 2 years for 10 years and inexplicably now owe more than they did to begin with.

If you remortgage for 25 years each time and roll the admin fees into the loan, this outcome is entirely feasible. Many people I know do a 2 year fix, then remortgage for another 25 years rather than another 23.

What one IMHO should do, expanding on your point, is aim to make mortgage repayment a percentage of ones' income. If your net income has gone up 10% since you last remortgaged, your payments should go up 10% too. You can afford it and it works towards paying the loan off faster.

The easiest way to do this is to ask for a loan term shorter than 25 years. My last but one mortgage was 25 years, the last was 19. This had the effect of ratcheting up what I paid so it was roughly the same percentage of income.

MarkyMarkD

IMHO it's better to have a longer term selected at the outset, but to make overpayments when you are able to afford to do so (if it's a product without repayment penalties or which allows repayments of up to 10% of balance per year, for example) - or when you remortgage (if it's a product with ties during the discount/fixed period).

Setting a shorter term in the first place means that your contractual payments are far higher and you have less "wiggle room" to deal with financial crises.

Of course, depending on your circumstances, you may be able to earn more on your savings than you pay on your mortgage - I do - but probably only if you have a non-working spouse who doesn't pay tax.  In those circumstances, the maximum mortgage is the best idea - and interest only, so an effectively infinite term.

When we remortgage this year, I shall increase the amount of the mortgage even more, and earn a fair margin between the receive and pay rates.  The only problem is my wife running out of tax allowance.

Reaper

I think it highly unlikely 15 year terms will catch on. That Yahoo article was only talking about small numbers of highly paid city workers. More relevent are the huge number of first time buyers who are struggling to get on the property ladder. There has been more talk about terms longer than 25 years coming in to bring the monthly repayments down to a level they can afford. Not that I think that's a good idea. House prices go up until people can't afford them any more. If you make it easier to borrow larger sums you just let them rise further. But I'm drifting off topic now...

Walletwatch

The only problem is my wife running out of tax allowance.

Well, that's a good position to be in, innit

I think the term of a mortgage depends on a number of factors - house prices, general income levels, interest rates, proportion of one's income that one can allocate for mortgage payments, etc. Since these other factors are fairly variable with time and quite a few of them are borrower-specific, it is convenient for both the lenders and borrowers to anchor one of the variables involved, and the automatic candidate is the tenure of the loan.

This is not to say that the term is not subject to change, as upheavels in the other factors mentioned above could (and indeed might have) changed the standard term.

Martinslovechild

Thank You all for your comments.

Like some of you, I too want rid of my mortgage. After several years 'in the dark' paying my 25-year mortgage, I now have a flexi mortgage which, fortunately, due to my stoozing activities, racks up the princely charge of £ZERO interest each month. Therefore, the full monthly amount we pay goes a long way to bringing down the capital amount owed, and fast.

Because Mrs MLC and myself were both agreed 4 years ago that we need to get rid of the dreaded mortgage, we've been making overpayments since that time and are now less than 3 years from the end.

But I just wondered who came up with the idea of a 25-year term in the first place...?? Maybe nobody actually remembers because it came about a long time ago, but I wondered if anybody recalls.

MarkyMarkD

I imagine it's lost in the mists of time ... but then, I'm surprised Robert Shilling doesn't know the answer!

It probably boils down to affordability and common sense ... longer terms might seem OK but there is severe danger of the mortgage not being paid off by retirement, given that FTBs are getting older all the time and retirement ages have been tending to get younger (although I know that trend may eventually reverse given the pensions crisis).

The more the term is extended, the less the impact on the monthly payments in any case, so it is less worthwhile to push the term out to 30, 35, 40 years.

Robert_Sterling_3

Robert Shilling knows that his father had a mortgage in the early twentieth century. He had a repayment mortgage over 13 years. The mortgage was with The Grays Building Society.

westernpromise

More relevent are the huge number of first time buyers who are struggling to get on the property ladder. There has been more talk about terms longer than 25 years coming in to bring the monthly repayments down to a level they can afford.

Bingo.

In Japan, just before their property crash 15 years ago, they got to 100-year mortgages. When you died your kids got the house and the mortgage.

When it gets that difficult to buy a house, a crash can't be far off. Japan had a 90% crash and has never recovered.

In this country the issue is that as interest rates have trended down over the last 12 years, buyers have simply paid higher prices in consequence. The £100,000 house of 1992 cost the same to buy as a £250,000 house now.

MarkyMarkD

But a 100 year mortgage is virtually the same as renting the house. There's nothing inherently wrong with renting, and the UK economy has a far higher proportion of owner-occupiers than other European countries. So if a crash just means a re-balancing of this proportion, I don't see the problem.