Research suggests homeowners could pay tens of thousands more
Taking out a mortgage has always felt like a big commitment, due to the many years over which you will be paying back the loan, quite apart from the size of the sum involved.
In previous decades, the 25-year mortgage term, which was always customary then, stretched into the distant future, to an end date that seemed almost inconceivable and sounded other worldly – a quarter of a century away, wow!
Today’s borrowers are looking even further ahead, taking on mortgages with terms up to 35 years – and even, in some circumstances, 40 years. But new research suggests that while a longer mortgage term can provide some short-term relief in the form of a lower mortgage payment per month, they also come with significantly higher overall interest charges.
The data, from broker Mojo Mortgages, indicates that extending a mortgage from 25 to 35 years can cost the average first-time buyer nearly £90,000 more. Its research was based on the current average mortgage rate for a two-year fix (75% LTV) at 5.44%, on an averagely-priced house, of £285,000.
“For a 25-year loan term, the total mortgage cost would be £391,200, which includes the principal amount and interest charges,” explained John Fraser-Tucker, the head of mortgages at Mojo. “However, if you extend the loan term to 35 years, the same house will cost an additional £87,180, bringing the total cost to £478,380.”
The broker suggests that, based on the average mortgage rate and house price, extending your term by one year could cost an additional £8,472, by two years an additional £17,040, and by five years, an additional £42,600, which is certainly sobering. There are regional variations too, reports Mojo.
The research highlights the importance of considering the long-term financial implications when choosing a mortgage term. A longer term could significantly impact future financial planning, including pension contributions and retirement lifestyle.
What do brokers advise their clients – longer or shorter mortgage terms?
So, what does the wider industry think of these findings? Is it wrong to go long?
Broker Richard Campo, head of growth at Heron Financial, recalled how when he started in the business, in 1999, terms of loans over 25 years, and extending past retirement, were a niche offering and actively discouraged – or not even possible at all, based on lender criteria at the time.
“In the intervening 25 years a lot has changed,” said Campo (pictured left), “primarily that house prices have moved on faster than wage inflation in that time.
“My advice on whether to extend the mortgage term is always – it depends. We will work with a client to establish a monthly budget they can work with, then work backwards to find the best product and terms we can set the loan up on.
“I always want more money in my clients’ pockets and not the banks’, but I also live in the real world. At a time when inflation and mortgage rates are falling, I don’t think it is such a bad thing to extend the term now, make things more manageable, with an eye to bringing that back in line down the track and even aiming to pay off faster as wages catch up and rates fall. This is where expert advice is crucial.”
As buying a property is now considerably more expensive in real terms, Campo reasoned, arranging longer mortgages and having to work longer will be par for the course unless something very significant happens to change it.
“God isn’t making any more land, yet there are more and more people,” Campo said. “My view is that it is always better to buy than not, so even if you have to pay that off over a longer term, so be it.”
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What mortgage term do first-time buyers opt for now?
Nearly all of the first-time buyers seen by Joela Jenvey, an independent mortgage and protection adviser at Nurture FS, have low deposits and are looking at 30 years plus for affordability.
“My advice to FTBs at the start of their home buying journey is that generally they will grow into the mortgages as their careers and salaries increase,” said Jenvey (pictured centre). “As long as they review and reduce the overall term as their income increases, then the overall cost will reduce.
“For most people it is a better option than waiting to buy, wasting money on rent while house prices continue to increase and then eventually the ability to take longer mortgage terms isn’t available to them as the customer is then that much older. I also encourage the use of the 10% overpayment facilities on fixed rates with all types of residential clients. Even making small overpayments can make a significant difference.”
Jenvey emphasised the importance of enduring customer and adviser relationships. “Customers returning to their adviser at every life stage can save the client lots of money in the longer term,” she said.
For Serena Smith (pictured right), mortgage & protection specialist, at Mortgages with Serena, a 35-year mortgage term has been standard over the 13 years she’s been advising, and buying property herself.
“My younger clients will still be mortgage free before state retirement age and many even in their late 50s / early 60s,” Smith shared. “An affordable monthly cost, being able to live month to month, is more important to them than the overall costs. I also include myself in this.”
