Are millennials taking a savvy approach to mortgages? Tepilo looks at a report which analyses how younger borrowers are managing their mortgages.
Millennials in Britain plan to take a savvy approach to managing their mortgages, according to new research. The findings, from mortgage advice firm L&C Mortgages, has revealed that 92% of 18-34 year olds have a repayment mortgage deal, which means they are gradually chipping away at the capital they owe.
What's more, they are keen for stability, security and consistency, with 69% of those surveyed on a fixed-rate mortgage (where the payments each month stay the same regardless of interest rate changes or other variables). That compares with just 35% of over-55s who have a fixed-rate package. A fixed-rate deal helps when it comes to monthly budgeting – as you know exactly what you'll be paying each month – and is therefore popular among first-time buyers eager for order and peace of mind.
The fact that younger homeowners prefer fixed-rate deals is of little surprise when you consider the challenges they face – not only in raising a deposit and purchasing a home, but also higher mortgage debt. According to L&C's study, millennials are shelling out on the highest monthly mortgage repayments of any age group with average contributions of £906 per month.
The research also showed that a quarter (25%) of millennials have remortgaged to get a better deal, higher than any other group. Again, this suggests a more savvy approach from Generation Y to find the best deals on the market, but it could also be reflective of these young homeowners getting a worse mortgage deal in the first place thanks to their age, earning potential, market conditions and other factors. In other words, millennials may have more reason to remortgage and scour the market for better deals.
By contrast, just 18% of over-55s – the generation often known as the baby boomers – have ever remortgaged to get a better deal. The two generations also differ when it comes to remortgaging to lower monthly payments, with 34% of millennials citing this as their main reason for remortgaging compared to 19% of over-55s. Again, this reflects the different situations of the two demographics, with younger homeowners tending to have a larger mortgage and higher monthly repayments than older borrowers. As such, it makes sense for millennials to shop around a bit more to secure the best deal, while the over-55s don't need to concern themselves with this as much.
Furthermore, millennials and older borrowers also differ when it comes to repayment methods – in fact, the differences are quite stark. Interest-only mortgages are much more popular among older generations, with nearly a third (32%) of over-55s having this type of mortgage compared to just 8% of younger homeowners. Interest-only mortgages are much less popular nowadays, and generally advised against for being too risky, which helps to explain this disparity. Interest-only mortgages are increasingly hard to come by, meaning millennials have little choice but to opt for a repayment deal.
The advantage of repayment deals, however, is to gradually pay off your mortgage, bit by bit, chipping away at it each month. By contrast, interest-only mortgages require a big lump sum to be paid at the end of the mortgage term, which can leave some people in financial bother. Over-55s on interest-only deals could face a potential shortfall when it comes to paying off their mortgage, whereas millennials can pay it down gradually over a number of years.
Millennials tend to be more open to mortgages that help them to manage their costs, the research also found. A third of 18-34 year olds have taken out an offset mortgage – an offset mortgage is where you have savings and a mortgage with the same lender and use your cash savings to reduce, or offset, the amount of mortgage interest you are charged. Of those millennials with an offset mortgage, 24% used their savings to reduce their term, while 10% used it to reduce their monthly payments. On the other hand, just 11% of over-55s have an offset deal and use their savings against their mortgage.
For all homeowners – whatever mortgage you have – keeping on top of mortgage repayments is crucial to ensure you avoid any financial issues. Additionally, it's vital that you don't overstretch yourself financially and borrow more than you can afford to pay back. Measures are now in place to ensure stringent repayment plans are a pre-cursor to buying a home, but it's important that homeowners can keep up with these repayment plans.
Younger people are, on the whole, taking a savvy, pragmatic approach to mortgages, making sure they don't bite off more than they chew with regards to monthly repayments. For most, mortgage repayments are likely to be the biggest outgoing each month, which is why a fixed-rate deal is a good way of managing a mortgage – with payments always set in stone. Others mortgages offer certain advantages, but lack the security and stability that a fixed-rate provides.
As a first-time buyer, however, it's always wise to seek advice from the experts first to ensure you are getting the best possible deal.
While the situation for older borrowers is generally seen as rosier when compared with millennials, this demographic face challenges too. The FCA, for example, predicts that 600,000 interest-only borrowers will see their mortgages mature before 2020, with many older borrowers left at risk of not having enough money to pay off the remaining part of their loan.
Lending criteria may also limit the over-55s. While many in this demographic will be reaching the end of their mortgage, others may be looking to remortgage or secure a new mortgage. Lenders, though, have limited the maximum age at the end of the mortgage to 70 or 75, although some are more flexible. Either way, older borrowers may find it useful to take a leaf out of the millennials' book and take a more active role in managing their mortgages.
As we've said before, it's important to manage your mortgage well and review your deal on a regular basis. Seek expert advice if you're unsure and remember to never stretch yourself financially, as this will only lead to issues and complications down the line.