Mortgage terms are getting longer. While the default has long been for homeowners to opt for a 25-year term, repaying a home loan over a borrowing lifetime of 30 or even 40 years is now common.
Borrowers may still prefer to take a series of two or five-year fixed rate deals over that home loan’s lifetime, but the term – as the full duration of a mortgage is known – is getting longer.
One of the many reasons why lenders have started to allow longer mortgage terms is because house prices have increased so much that first-time buyers struggle to get on the property ladder annd home movers have difficulty trading up.
Spreading a mortgage’s lifetime of repayments over a longer period makes borrower’s monthly bills more affordable, meaning it could be easier to get approved for a bigger loan.
However, the cost of paying interest over more years mounts up, so they ultimately pay back more.
Should you cut your mortgage rate down from the default 25 years or stretch your term to as long as 40 years?
With house prices having risen dramatically in recent years, not to mention the cost-of-living crisis, cheaper monthly payments may appeal to some.
But mortgage terms can stretch both ways. For those who can afford to pay a bit more off their mortgage each month, taking a shorter-than-average repayment term will mean interest has less time to mount up.
This means they end up paying a lower amount overall, and could become mortgage-free sooner.
This is Money looks at the benefits of choosing a mortgage term longer or shorter than 25 years, and explains what borrowers need to look out for.
Stark increase in 35 year-plus mortgages
Research shows that more people are taking on longer-term mortgages than ever before.
Data from wealth manager Quilter shows a sharp increase in the number of mortgage sales with a term of more than 35 years at the beginning of 2021.
In March last year, 25,112 mortgages were taken out with a term of 35 or more years – a 70 per cent increase compared with the 14,765 that applied for longer terms in March 2019.
According to experts, this was prompted in part by house price increases, which meant some people had to take larger mortgages and wanted to pay them off for longer.
David Hollingworth, associate director at L&C Mortgages, explains: ‘You’re seeing first-time and next-time buyers pushing terms out at 30 to 35 years as they’re looking for a bit of breathing space when it comes to repayments.’
Who can get a longer mortgage?
Longer mortgage terms are not available to all borrowers, as individual banks have different lending criteria.
You also stand a greater chance of getting a longer term the younger you are.
Hollingworth explains: ‘Most lenders will want you to pay your mortgage off by retirement age, which could be around 70.
‘But if you go beyond that they’ll ask more questions on what your income will look like post-retirement.
‘It’s possible to go up to the age of 80, but lenders have to consider whether that’s affordable for you.’
Younger people may need to take a longer mortgage at first in order to afford the repayments, but that doesn’t mean they need to stay on one forever.
The term of a mortgage can be reduced when the borrower comes to remortgage, which may be a good idea if their income increases and they are able to pay more as it will reduce the overall interest.
Experts say those with long terms should cut them as soon as they can afford it, and resist the temptation to keep their monthly payments low – especially if this would mean them taking their mortgage into retirement.
Hollingworth adds: ‘Longer terms can be a useful option, particularly in the early stages.
‘But have the discipline to revisit it or to completely change the repayment term as your situation improves.
‘You don’t want a mortgage beyond retirement if you can help it.’
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How much can cutting the term save?
The total amount a borrower pays for their mortgage depends on three things: the amount of the loan, the interest rate payable and the length of the term.
Those who can comfortably afford a standard 25-year mortgage on their chosen home may want to consider shortening the term further in order to pay less interest overall.
According to Quilter, a borrower could save a substantial sum by reducing the mortgage term by two years from 25 years to 23.
In their example, a borrower takes out a £200,000 mortgage with an initial five-year fixed rate of 1.79 per cent.
After the five years, the borrower pays their lender’s standard variable rate at 3.74 per cent for the remaining term.
This means they would pay a total of £287,935 over 25 years, or £1.44 for every £1 borrowed.
But if they cut the term down by two years, they would pay more than £9,000 less.
‘If they reduced that down to 23 years using the same example, they would pay £1.39 for every £1 borrowed or a total of £278,743,’ says Karen Noye, mortgage expert at Quilter. ‘They would make a saving of £9,192 – just by shaving off two years.’
This example does not account for remortgaging after the initial fixed term deal, so a borrower could potentially save even more in interest if they switched to a cheaper rate.
When should a borrower shorten their mortgage?
If it is within your budget to do so, you can ask to reduce the term down from the default 25 years at the start of a new mortgage application.
Stuart Powell, managing director at Ocean Mortgages, suggests that borrowers decide what monthly payments they can afford first, then work our the term they need from there.
Karen Noye of Quilter says you can save money by shaving two years off the term of your mortgage
‘If your mortgage budget can be £800 per month and, after considering the interest rate and the amount you are borrowing, this means a 23-year term is £798 per month, then your term should be 23 years.
‘By not going for the default 25-year term, the adviser will have saved you 24 monthly mortgage payments, as well as the interest that another two-year mortgage term would add to your overall payments.’
You can also change the term of the loan when you remortgage.
Mark Robinson, managing director at Albion Forest Mortgages, says: ‘Your mortgage term shouldn’t be decided by a default term that is offered to everyone. People should have the appropriate term for their situation.
‘I had a couple once, who initially had a 30-year term mortgage and two years later we remortgaged.
‘They had both had pay rises and had been overpaying their mortgage, and we brought it down to 22 years as they felt they could afford it.
‘They just wanted the mortgage gone before the last tango in their careers so they could move on to enjoying retirement.’
Another way to cut your term is by simply overpaying each month, meaning the total loan could be paid off sooner.
Hollingworth points out: ‘Typically you have the option to overpay up to 10 per cent per annum without penalty, which is often more than most people need.
‘It gives you flexibility, so when you’ve got a bit of spare cash you can then just take an ad hoc lump sum off as and when you feel it’s appropriate.’
Borrowers should take account of the date when their mortgage will be repaid, as they could incur an early repayment charge (ERC) if they are within a fixed term deal.
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