Desperate buyers extend mortgages
First-time owners shoulder more interest but lower monthly costs by choosing longer repayment periods
HOMEOWNERS and first-time buyers are drastically increasing the length of their mortgages in an attempt to reduce their monthly payments, Britain’s biggest lenders have said.
Paying a mortgage over a longer period than the traditional 25 years can significantly lower repayments but mortgage brokers warned doing so will add huge amounts to the total interest paid over the lifetime of the loan. Average rates have tripled compared with this time last year as the cost of borrowing soared because of rising inflation.
First Direct, part of HSBC, reported that applications from existing and prospective homeowners for terms over 35 years more than doubled in the first half of 2022. For terms longer than 25 years, applications have risen by more than a third over this year, the bank said.
TSB said it has seen an rise in people taking out mortgage terms of 35 to 40 years in the past 12 months. NatWest said that when it raised its maximum term from 35 to 40 years in April, there was an increase in people taking the offer, while Atom Bank said there has been a “steady increase” in customers moving to longer terms in the past year.
Carl Watchorn, head of mortgages at First Direct, said: “Longer mortgage terms may be an option for customers who want to make monthly payments more affordable. However, applicants will end up paying more interest over the lifetime of the mortgage.”
The average two-year fixed mortgage rate was 6.45 per cent on Friday, up from 2.34 per cent at the start of December 2021. The average five-year deal rose from 2.64 per cent to 6.28 per cent in the same period.
A homeowner with a £320,000 mortgage on a deal fixed at 6.45 per cent would save £229 a month by switching from a 25-year term to a 35-year term, according to broker L&C Mortgages. Their monthly payments on a 25-year term would be £2,151, compared with £1,922 per month on a 35-year term. But they would pay an extra £162,170 over the mortgage’s duration. On a 40-year term, the owner would pay £1,862 a month – but £248,593 more in interest.
Adrian Anderson, of broker Anderson Harris, said this was typically only available to people in their 20s and 30s.
He said: “Most lenders will be looking at people’s employed income or selfemployed income, so the mortgage is based on that. Banks are presuming that they’re probably going to stop working at 70 and their retirement income will be significantly less than that.”
David Hollingworth, of L&C Mortgages, said older people may be able to secure longer-term mortgages if they can prove that they will be able to afford the repayments using their pensions, though most people will want to be mortgage-free when they retire.
He added: “If you find that, actually, things are not quite as tight as you feared, there is always the scope to overpay.”
Most lenders will allow borrowers to pay 10 per cent of the outstanding loan each year, which can reduce the time it takes to pay off the mortgage and cut the interest paid. A homeowner who wanted to increase payments could pay off their mortgage 10 years early and save the added interest costs of moving on to a 35-year deal, according to L&C.