Why do mortgages get cheaper the longer you are in the house?

May 18th, 2010

Mortgages take a large part of many people’s income when the home is first bought. Over time there is a gradual fall in the share of income that mortgage repayments take out of income. This can be used to the advantage of both a new home buyer and someone who has been in their home for a long time.

Inflation means that although the debt stays at the same level as it had done before both the income that services the loan, as well as the value of the property have increased. This means that a mortgage becomes more affordable over time as the income rises in relation to the debt repayments and repayments that once seemed challenging can now seem less so.

It is not only inflation that does this. Houses often rise in price naturally as the owner does work on the house and the resulting improvements add to the house’s value. Unless money was borrowed for these improvements then the debt is not added to. It is also the case that most people advance in their careers after the time when many people buy their first house, which means that their income is a larger multiple of the house. These factors are added to the fact that mortgages that are on a repayment scheme are paid down gradually over time.

These factors mean that a new home buyer, as long as they are confident in their ability to progress in their career, is able to contemplate buying a house when the mortgage repayments are tight. This should be done with care as a mortgage is a large decision that should not be taken lightly. It is rarely a good idea to use this as an excuse to buy a bigger property than would otherwise be needed arguing that property always goes up. Property can go down in value as well.

A new buyer can also contemplate using interest only mortgages. However this is a bad idea in the long term as the mortgage does not get paid and over the long term the mortgage is more expensive.

Refinancing is also something that can be done at a later stage as the income is higher, the debt is lower and the property is more valuable. All these factors mean that more mortgages will become available and that many of should be considerably cheaper than they were when the mortgage was first taken out.

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