Younger homebuyers extend their mortgages for at least 35 years, accounting for a third of their total bill
- Homeowners forced to extend mortgage terms to keep costs down
- But reducing what you pay each month means a larger overall bill
A quarter of homeowners under 30 are extending the term of their mortgage for 35 years or more, accounting for 30 percent of their total bill.
The combination of high house prices, high mortgage rates and the rising cost of living means that many younger homeowners have resorted to extending the length of their mortgage beyond the standard 25 years to make the payments.
A quarter (25 percent) of homebuyers under age 30 have a mortgage term of 35 years or longer, according to credit checking firm Experian, up 10 percent from the same period in 2020.
But moving away from standard 20- to 30-year mortgage terms comes at a cost, as homeowners pay more overall and face the prospect of continuing to pay a mortgage loan into their seventies.
Long term: An extended mortgage term can make monthly payments cheaper, but borrowers pay more overall since interest has more time to accrue.
Experian head of consumer affairs James Jones said: “Our data suggests that people under 30 are looking to lock in longer mortgage repayment terms to help keep their monthly home payments down, and this could also be affecting property purchasing among house hunters.
“As high interest rates increase pressure on borrowers, young people may feel ‘stuck’, so we are encouraging people to consider ways they can get better deals on the terms of their mortgages.”
Why are homeowners extending their mortgages?
To reduce monthly mortgage payments. By spreading the cost of a home loan over a longer period, you pay less per month, but more overall.
This means many will be paying home loans well into their seventies in exchange for lower monthly mortgage bills now.
For example, the average house is now worth £257,808, according to building society Nationwide, and the best five-year fixed mortgage rates are around 5 per cent.
Beyond the peak? Fixed mortgage rates are falling after an avalanche of rate hikes in recent months
Mortgage rates have been rising in response to continued increases in the Bank of England’s base rate, which last month stood at 5.25 per cent.
Someone buying a median-priced home with a 10 per cent deposit and a 5 per cent mortgage would pay £1,356.41 a month in mortgage payments over 25 years.
But extending the term to 30 years would mean these payments would be reduced to £1,245.58 a month, or £1,171.02 over 35 years.
Why do I pay more with a longer term mortgage?
Because as mortgage loan terms lengthen, consumers pay more interest.
That interest can increase what you owe your bank by a third.
Taking the example above, a homeowner with a 25-year term would pay £407,070. But that rises to £448,591 over 30 years and £492,052 over 35.
For a 40-year home loan, repayments rise to £537,302, 31 per cent more than over a 25-year term.
What to do if you need a mortgage
Borrowers who need to find a mortgage because their current fixed-rate agreement is coming to an end, or because they have agreed to purchase a home, should explore their options as soon as possible.
This is Money’s best mortgage rate calculator, powered by L&C, which can show you offers that match the value of your mortgage and your property.
What happens if I need to remortgage?
Borrowers should compare rates and speak to a mortgage broker and be prepared to take action to lock in a rate.
Anyone with a fixed rate deal ending within the next six to nine months should look at how much it would cost to remortgage now and consider striking a new deal.
Most mortgage agreements allow fees to be added to the loan and then only charged when you take out. By doing this, borrowers can lock in a rate without paying expensive origination fees.
What happens if I am buying a house?
Those with agreed-upon home purchases should also try to lock in rates as early as possible, so they know exactly what their monthly payments will be.
Homebuyers should be careful not to overextend themselves and be prepared for the possibility that home prices may fall from their current high levels as higher mortgage rates limit people’s ability to borrow.
How to compare mortgage costs
The best way to compare mortgage costs and find the right deal for you is to talk to a good broker.
You can use our best mortgage rate calculator to show you deals that match your home value, mortgage size, term, and fixed rate needs.
However, be aware that rates can change quickly, so the advice is that if you need a mortgage, compare rates and then speak to a broker as soon as possible, so they can help you find the right mortgage for you. .
> Check the best fixed rate mortgages that you can request