A COMMON mortgage mistake could be costing homeowners £19,000 over the life of their loan – but an expert explains how to avoid shelling out more than necessary.
Those lucky enough to have enough cash in the bank for a deposit need to be aware of the hidden cost of picking a longer mortgage term.
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A mortgage term is the amount of time it takes to pay off your loan – you can choose to take out a shorter term or a longer one.
Shorter terms are usually considered to be 20 years or less, while a term of 30-years is classed as a longer term.
The most common mortgage term is a 25-year mortgage, but you could pick one which runs for as long as 40 years.
As house prices continue to soar, choosing a longer mortgage term is one way that buyers can lower their monthly repayments – but it comes at a price.
Opting for a longer term could mean that you’re paying much more in interest repayments than you would otherwise, Coreco technical director Nick Morrey warns.
He has decades of experience dishing out mortgage tips, and is one of the experts on The Sun’s Squeeze Team panel.
If you’re worried about how to make ends meet, are struggling to pay off your debts or don’t know how best to manage your cash, get in touch by emailing [email protected].
Andrew’s money saving tips will come in use as rising interest rates could add £612 onto your mortgage repayments.
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The Bank of England hiked interest rates to 1% earlier this month – making the cost of borrowing from loans, credit cards and mortgage repayments more expensive.
Anyone with a variable or tracker mortgage will feel the pinch quickest, as these deals are linked to the Bank’s base rate – when it goes up, so do your monthly repayments.
Here’s why taking out a longer term mortgage could add £19,000 onto your repayments.
Higher interest repayments – up to £19,000
Taking out a longer term mortgage might be tempting initially.
Your repayments are spread over a longer period of time – which means that the amount you pay back each month will be lower.
This could be attractive – especially as households are having to pay more for other bills like energy, food and fuel each month.
But if you can afford to meet higher repayment rates, it may make sense to choose a shorter mortgage term.
The shorter your mortgage term, the less time there is for interest to rack up, adding to the total amount you repay over the period of your loan.
For example, on a £250,000 mortgage at an interest rate of 2.5% with a 25-year term, your monthly repayments would be £1,122.
The total amount you would repay in interest over the 25 years before you clear your mortgage is £86,506.
If instead you opted for a 30-year term, your monthly repayments would drop to a more manageable £988. But you’d pay a total of £105,662 in interest.
“The 30-year term is £19,146 more expensive due to the extra five years having interest charged on it,” Mr Morrey said.
“So while long mortgage terms are very helpful to minimise monthly cost but as you pay interest for a long time the total cost can be significantly higher.
“If you can afford to reduce the term in any way, which could be through higher payments or regular or ad hoc over payments, then that is usually a good idea.”
How else could a longer term mortgage affect me?
Taking out a longer mortgage term could also affect when you’re able to retire.
If you’re paying back your mortgage over a longer period of time, you’ll most likely need to keep working to have the funds available to meet the repayments.
“When people opt for a term that means they are still paying it back beyond the age 70, it may well mean that retirement cannot occur before that age when perhaps it should,” Mr Morrey said.
“You may have plans to clear the balance before then, but if those plans don’t materialise then you could be faced with working longer than perhaps you should.”
One option that buyers could take is to get a long mortgage term initially, and then reduce it when they come to remortgage and potentially have a higher salary and can cope with larger repayments.
It’s important to review your mortgage deal regularly anyway, as there might be better rates available, which could also cut your costs.
A new plan has recently been launched that could help first-time buyers get on the ladder – we explain what it is.
While another mortgage expert explains the tricks to getting your application approved as it gets harder to clinch a deal.
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