Look before you leap into a fifty year home loan

Home loans running up to 50 years could be the reaction to longer working lives and higher house prices, mortgage brokers Charcol suggested this week.

It said home loan terms could double to 40 or even 50 years to keep repayments affordable if the UK follows the Japanese model of ultra-high property prices. In Japan, interest-only loans lasting up to 100 years are common, with the mortgage passed down through generations. But as the borrowing is never repaid, home loans have effectively become a form of long-term secure tenancy.

It seems bizarre that some financial companies believe there will be a demand for longer mortgage terms when the low interest environment of the last few years has encouraged people pay off their mortgages early.

To opt instead for something more akin to a long-term tenancy is to go in the opposite direction. But such is the crazy nature of the housing market in property hotspots around the country that this may prove to be a route some people investigate. They need to think carefully, however. While five decade long loans offer lower monthly payments, these gains are largely illusory.

On a current 5% mortgage rate, a £100,000 repayment borrower would pay back £585 a month over 25 years, £482 a month over 40 years and £454 a month over half a century according to Charcol.

The long-term loan could be almost 30% higher for the same monthly outlay. But if interest rates go up, the advantage fades rapidly.

"Rates held steady this month but our economists expect some rises over this year," says Abbey National. "And once rates rise, the gap between 25 and 50 year loans narrows. In particular, you could find that stretching beyond 30 years only saves a pound or two a month."

At 8%, the monthly costs on £100,000 and total payments (in brackets) are:

15 years £956 (£172,080)

25 years £772 (£231,600)

30 years £734 (£264,240)

40 years £695 (£333,600)

50 years £679 (£407,400)

And if rates return to their early 90s peak of 15%, the loan would cost:

15 years £1,400 (£252,000)

25 years £1,281 (£384,300)

30 years £1,264 (£455,040)

40 years £1,253 (£601,440)

50 years £1,251 (£750,600)

So extending the loan 35 years costs nearly £500,000 and saves less than £5 a day. But there are other costs as well. Lenders demand life cover. And this can be prohibitive over long periods - if homebuyers can find a quote.

Abbey National says 35 years is the maximum for its mortgage life cover. Premiums on a £100,000 repayment loan over 15 years for a 25-year-old couple work out at £12.76 a month, £15.88 over 25 years and £16.74 for 30 years' protection.

But that cover only protects the couple while they are still unlikely to die. A 50-year term takes almost everyone into a high mortality zone.

Norwich Union does not currently offer mortgage-linked life cover beyond the age of 70 or critical illness plans beyond the age of 75. "Borrowing into old age has real price implications," the insurer says.

For a couple, both aged 29 and in good health, it quotes £10.40 a month for 25 years' cover but £55.70 for 50 years'.

Roderic Rennison at Charcol says insurers will have to be more imaginative. "You could devise lump sum schemes, plans where the early years are cheaper than latter years but you can stop if you want, and policies where you pay for your entire life," he says.