Increasing your mortgage term can make repayments cheaper
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Longer mortgage terms for cheaper repayments
Monday, 19 Feb 2007 13:56
Britons are increasingly choosing to increase the term of their mortgage beyond the standard 25-years in an effort to afford to buy a home.
However, while increasing the length of time it takes to pay off a loan can see monthly repayments become as much as £170 cheaper - households can end up paying tens of thousands of pounds more in interest over the term of the loan.
"For many years the standard term considered for a mortgage in the UK was 25 years, but as affordability becomes increasingly difficult for many of today’s first-time buyers, a 25-year term is perhaps no longer considered sufficient," said Julia Harris, analyst at Moneyfacts.co.uk.
"Eight out of ten lenders now offer maximum mortgage terms in excess of 25 years. A quarter of lenders are now offering a 40-year mortgage term and a handful is offering the maximum possible term of 52 years," she added.
But while making it cheaper in the short term, increasing the term of a loan can prove expensive in the long run.
"Extending the term of your mortgage will undoubtedly lower your monthly repayments and can be a useful means of initially affording the mortgage until your salary increases, but the longer you stay on a long term mortgage, the more you will see your interest costs spiral," Ms Harris said.
On a 25-year repayment mortgage of £130,000 charging 5.25 per cent, extending the term by five years will increase the total amount payable by close to £25,000 Moneyfacts calculates.
Increasing the term of the loan to 40 years adds £77,500 interest to your bill.
But the increased interest is not putting people off, with 38 per cent of those questioned in a recent Moneyfacts poll looking for a mortgage term longer than 25 years.
However, buyers should not despair.
"The key to reaching the much sought after status of mortgage-free living is to take control of your mortgage, overpay whenever you can and make sure you review your mortgage deal on a regular basis," Ms Harris concludes.