Super-term mortgages, which are those that exceed the traditional 30-year mortgage term gained in popularity during the boom years as a means of decreasing monthly repayments for consumers, especially first-time buyers.
All major lenders now offer mortgages that exceed 30-year terms and 35-year terms is one the most common. A few lenders offer a maximum term of 40 years.
Director of the Irish Mortgage Corporation Frank Conway said 35-year and 40-year term loans meant consumers were in a position to purchase property that would have otherwise been beyond their reach financially.
“During the height of the property boom, approximately 18% of first time buyers funded the purchase of their new home with a 40-year mortgage.
“A major flaw in the super term loan product is the increased cost of borrowing incurred by a consumer.”
Mr Conway said it is “not inconceivable” that lenders could introduce a ban on super-term mortgages, as these types of loans artificially increase “affordability” and significantly increase the cost of borrowing to the consumer.
“Now that property prices have crashed, the need for super term mortgages is simply not there. Consumers should be able to fund and purchase property on a simple 30-year contract,” he said.
On €300,000 3% loan the total cost of borrowing on a 40-year loan terms compared to a 30-year loan term is an extra €60,165 over the life of the loan.
“So, even though the client using the 40-year mortgage has 15% more affordability than the same person borrowing on a 30-year term loan, the total cost of interest is 39% greater over the full term of the loan.” said Mr Conway.
Chief executive of the Irish Brokers Association, Ciaran Phelan said that while the banks may be intimating these changes in the hope they will lead to more prudential lending in the mortgage market, this is not a one-size-fits all approach that will act as the perfect panacea to the current problems in the market.