How longer-term mortgages heap up the costs
The Bank of England warned this week against the growing trend among banks and building societies to offer mortgages to home buyers on longer terms of 30 or even 35 years.
This practice could “store up problems for the future”, warned Sam Woods, head of the Bank’s Prudential Regulation Authority in a speech on July 10. One problem highlighted by Mr Woods was that borrowers’ retirement finances would be eroded by repayments stretching into older age.
What he did not highlight, however, is the huge additional cost in interest born by borrowers who take out longer-term mortgages.
The traditional mortgage term has
Monthly payments are lower, but the interest makes the total cost far higher
for decades been set at 25 years. But with rising house prices, longer-term deals have been used as a way of reducing monthly mortgage outgoings and making home-buying more affordable. Most major lenders will now offer terms of up to 35 years.
Longer mortgage terms are common in countries where house price inflation has outstripped wage growth. In Japan and Sweden, for instance, mortgages on terms spanning 100 years have been commonplace. Properties are often bequeathed to heirs with mortgages still outstanding.
While monthly payments are lower, the overall cost to borrowers is far greater as interest compounds over a longer period. Calculations by Telegraph Money show how longer mortgage terms add to the total bill. All assume an upfront charge of £500 and interest rates averaging 4.5pc over the full term. The total paid includes interest and capital.
Assume a loan of £100,000. Over 25 years: monthly repayments average £556 and the total paid is £167,250.
Over 30 years: monthly repayments average £510 and the total amount paid is £182,900.
Over 35 years: monthly repayments average £473 and the total amount paid is £199,250.
Assume a loan of £250,000. Over 25 years: monthly repayments average £1,390 and the total paid is £417,350.
Over 30 years: monthly repayments average £1,267 and the total amount paid is £456,500.
Over 35 years: monthly repayments average £1,183 and the total amount paid is £497,400.
Assume a loan of £400,000. Over 25 years: monthly repayments average £2,223 and the total paid is £667,500.
Over 30 years: monthly repayments average £2,027 and the total amount paid is £730,125.
Over 35 years: monthly repayments average £1,893 and the total amount paid is £795,550.