Energy bills force homeowners to take out loans for longer

Homebuyers are struggling to take out 25-year mortgages as soaring energy bills have made it harder to get through bank affordability checks.

Instead, borrowers are forced to take out 40-year mortgages to spread the cost of their loans and make repayments affordable.

Millions of people will have to pay more on their energy bills than their mortgages this winter and borrowers have turned to ultra-long mortgages to reduce monthly outgoings. The number of buyers looking for a mortgage with a term of 40 years or more has doubled in the past year to more than 10,000 per week, according to analysis by Twenty7Tec, a mortgage data. Borrowers have always used loans with a term of 25 years.

Longer mortgages mean smaller monthly repayments, which helps overburdened borrowers pass the affordability tests set by lenders. But buyers will pay a lot more over the term of the mortgage because the interest due on the loan is longer.

A borrower with a mortgage of £250,000 at a rate of 3.5% would pay £125,600 in interest over a term of 25 years. The same mortgage over a 40-year term would cost £215,098 in interest, almost £90,000 more.

But homeowners and first-time buyers have had little choice in the face of soaring utility, food and fuel bills, which have hampered their borrowing power.

Analysts at Investec bank this week raised their forecast for the annual price cap, predicting it will hit £3,523 in October and then rise to £4,210 in January. That compares to a cap of £1,977 today. Separate forecasts from consultancy BFY Group have warned that the average gas and electricity bill could hit £500 a month this winter, meaning many will pay more for energy than their homes.

James V. Hayes