Struggling homeowners and buyers are taking on longer mortgages in an attempt to cut rising rates, new data reveals.
The number of people taking out mortgages with terms of 35 years or longer peaked at 88,059 in 2022 compared to just 40,471 in 2018, an increase of 117%.
Finance firm Quilter examined mortgage data from the Financial Conduct Authority regulator that shows how borrowers are trying to lower their monthly costs.
Homeowners have been hit by rising mortgage rates, with some now exceeding 7 percent.
Mortgage extension: Getting a longer-term mortgage is one way to lower your monthly costs, although you’ll pay more interest overall.
While increasing the term of a home loan reduces your monthly mortgage payments, it also means the total amount paid increases.
Allowing homeowners to extend the term of their mortgage without hurting their credit score was one of the pillars of the recent government mortgage statute, which went into effect earlier this month.
The package, agreed in conjunction with many of the UK’s largest mortgage lenders, also protects homeowners from repossession for 12 months from their first arrears and provides the option to switch to an interest-only loan for six months without penalty.
Mortgage prices are rising due to successive Bank of England interest rate increases since December 2021, which are factored into the price of new home loans.
That, combined with record-high home prices, is forcing people to take longer terms to lower their monthly payments.
There are also now almost four times as many people applying for mortgages with terms they will still be paying at age 70.
In 2022, there were more than 12,000 people over the age of 41 who applied for a 30-35 year term.
By comparison, in 2018 only 3,035 people over the age of 41 took out a mortgage of this duration.
The Bank of England base rate is now 5 per cent, and the average two-year 95 per cent LTV fixed rate is around 6.5 per cent, making it likely that even more people, regardless of age, will be forced to take out longer mortgage terms.
Karen Noye, Quilter’s Mortgage Expert, said: ‘For anyone considering a mortgage that will carry them into retirement, it is vital that they think ahead and be aware of potential risks.
‘Many people save for their retirement anyway without even considering the fact that they won’t earn and will have to pay a mortgage and living costs.
‘Similarly, while a mortgage term of 35 years or more may result in lower monthly payments, you’ll likely pay significantly more in interest over the course of your mortgage term.
“If possible, it’s always worth getting mortgage advice when possible to ensure you’re doing the best for your finances, as the cheapest deal isn’t always the most valuable, especially in the long run.”
We discuss how easy it is to change the term of your mortgage and what the implications are.
What does it mean to extend the term of your mortgage?
The term of a mortgage is the time you have to repay a loan. Reducing the term means that the loan is repaid in a shorter period of time, increasing the monthly payments.
Extending the term of your mortgage will lower your monthly costs since the loan is paid off over a longer period of time.
Mortgage terms are typically 20 to 30 years, and borrowers often agree to rates for two to five years at a time.
It’s also important to remember that extending the term of the mortgage will increase the total amount of interest you would have paid over the life of the loan, adding to your total cost, even if it means making payments more affordable in the short term.
If a £350,000 25-year mortgage passes at an interest rate of 6 per cent, that means payments of £2,256 a month.
By increasing the term of the loan to 30 years, the payments are reduced to £2,099 per month, a difference of around £157 per month.
However, with a term of 25 years, the total interest paid on the loan is £326,516.47; extending the term to 30 years increases this figure to £405,433.66.
The additional five years of interest payments results in almost £80,000 being added to the total cost of the loan.
This means that any decision to extend must be taken very carefully, as it can be extremely costly in the long run.
> Use our True Cost Mortgage Calculator to find out how changing your loan term could affect your payments
Can you extend the term of your mortgage without the need for a new loan?
There are no standard requirements for what you must do if you want to change the term of your loan, as this varies between lenders.
Most will ask you to complete a new application when changing the fundamentals of a mortgage.
The lender will want to be sure that you can still pay the payments after the change, so it may be a longer process to shorten the term, as your payments will increase.
Any change to the original mortgage term will require a new mortgage application, which means a reassessment of your income, circumstances, credit report, and lender criteria at the time of application.
In practice, if none of your circumstances have changed, this shouldn’t be a problem.
On the Rise: Rising interest rates continue to affect homeowners, who have to shoulder much higher mortgage payments
But if your income has dropped or a lender’s criteria have changed, your current lender may not be able to offer you the same terms as before.
In this case, it might be cheaper to remortgage with a new lender.
Nicholas Mendes, mortgage technical manager at mortgage broker John Charcol, said: “Most lenders will allow you to extend the term and keep the existing product you’re on, such as a fixed rate, although there will be some exceptions.”
This is the same if you want to revert the change later, so it’s worth making sure the move is long-term to avoid further complications.
Does extending the term of your mortgage mean any penalties from lenders?
Changing the term of your mortgage is unlikely to directly result in you having to pay penalties.
However, if the change means changes to the product, such as a rate change, you’ll need to talk to the lender to see if you’ll be responsible for any early repayment fees as a result.
Will changing the term of your mortgage affect your credit score?
No, changing the term of your mortgage itself should not affect your score. However, if your lender requires a new hard credit search, this will appear on your credit report.
That can make it difficult to get decent terms on mortgages and loans.
It’s always worth asking lenders before making any changes, and you may not be able to use a broker for the process.
What has changed the mortgage letter?
Lenders are likely to be helpful when working with borrowers to extend their mortgage under the terms of the statute.
Borrowers also have more options to change the term of their mortgage.
However, Mendes adds that the charter has changed little in terms of the specific rights of borrowers.
He added: ‘Anyone can already talk to their bank or their mortgage lender, and just talking won’t have any impact on your credit score. However, many borrowers don’t realize this, so it’s helpful to reinforce the message, but it doesn’t change anything otherwise.’
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