AS millions of us struggle with bills, there’s an easy way to cut down your monthly mortgage payments.
But is it worth it in the long run? We explain.
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Whether you are looking for your first mortgage or shopping around to remortgage most of us focus on the interest rate and the initial deal.
You may opt for a five-year fix or a two-year tracker. But what about the mortgage term?
The term is the length of time you have to repay your entire mortgage.
For decades the norm has been a 25-year mortgage term. But times they are a changing.
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Now almost a quarter of remortgagers are opting for a mortgage term of 30 years or longer, according to figures from UK Finance.
The reason for this is it can cut your monthly repayments substantially.
Taking longer to repay your mortgage means you need to pay off less capital each month, so your payments are lower.
“Twenty-five years ago, most new mortgages were for 25 years. This was the default option, and many people didn’t even consider a different term,” says Ray Boulger, senior mortgage technical manager at John Charcol mortgage brokers.
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“With today’s much higher house prices many purchasers, particularly first-time buyers, are choosing longer mortgage terms of 30 years or 35 years, and sometimes even 40 years, as a way of making the purchase of their new home affordable, by reducing monthly payments.”
Rising interest rates have led to lenders hiking mortgage rates massively.
What is the Bank of England base rate and how does it affect me?
That has left homeowners looking for any way to cut their repayments. Someone coming off a two-year fixed-rate mortgage is facing a shock jump in their monthly bills.
The average mortgage interest rate in April 2022 was 1.64%, now it is 5.74%.
That means someone with a £250,000 25-year mortgage would see their repayments jump by over £500 a month.
One way to ease the pain is to extend your mortgage term. If the homeowner with a £250,000 mortgage with a 5.74% interest rate opting for a 30-year mortgage term their monthly repayment would fall by £114 cutting their annual bill by £1,368.
Go further – and opt for a 40-year mortgage term and your mortgage repayments would fall even more sharply – by £241 in the above example.
It’s hardly surprising then that 24% of mortgages taken out last December had a term of 30 years or more.
Types of mortgage
A fixed rate mortgage provides an interest rate that remains the same for an agreed period such as two, five or even 10 years.
You monthly repayments would remain the same for the whole deal period.
There are a few different types of variable mortgage and, as the name suggests, the rates can change.
A tracker mortgage sets your rate a certain percentage above or below an external benchmark.
This is usually the Bank of England base rate or a bank may have its own figure.
If the base rate rises, so will your mortgage but if it drops then your monthly repayments will be reduced.
A standard variable rate (SVR) is a default rate offered by banks. You usually revert to this at the end of a fixed deal term, unless you get a new onw.
SVRs are generally higher than other types of mortage, so if you’re on one then you’re likely to be paying more than you need to.
Variable rate mortgages often don’t have exit fees while a fixed rate could do.
WATCH OUT FOR THE AGE CAP
Not everyone can get a mortgage extension. Lenders can block your application if they think you are too old.
Most have an age limit of 70 for mortgage lending. If a term of 30 years would mean you wouldn’t repay your mortgage before you hit the age limit the lender could reject your mortgage application.
If you are older and remortgaging, look at what your current mortgage term is – it falls with every year you have your mortgage. So, you may still be able to extend your term to cut your bills.
Let’s say you took out a 25-year mortgage a decade ago, the remaining term would be 15 years now.
In which case you may be able to extend it to cut your monthly bills without falling foul of your bank’s maximum lending age.
A short-term save that will cost you
Extending your term will cut your monthly bills but it will cost you in the long run. The longer you take to pay off your mortgage the more interest you’ll pay overall.
Let’s go back to our homeowner with a £250,000 mortgage at 5.74%.
By opting for a 30-year mortgage term their monthly bills will drop by £114, but they will end up paying over £50,000 more interest than if they had stuck with a 25-year mortgage term.
But you don’t have to stay on a 30-year mortgage term forever. “Few people stay in the same home for 30 years and so in practice most mortgages of 30+ years are repaid when the home is sold,” says Boulger.
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“Furthermore, as most borrowers have a fixed rate for between two and five years, every time a fixed rate ends the term of the mortgage could be reduced if the homeowner is able to afford higher payments, perhaps because interest rates have fallen.”
So, a longer mortgage term could help you afford your repayments while interest rates are high, but you could shorten the term again when rates fall to reduce the overall amount of interest you pay on your mortgage.
Extending my mortgage term saved me £564 a month
MICHAEL Taylor, 33, a professional stock trader at Shifting Shares opted to extend the mortgage term on his three-bedroom semi-detached property in Hartlepool in Autumn 2022.
Faced with soaring interest rates he decided to pay an early repayment charge and remortage before the end of his deal to secure a new deal before rates rose any further.
The interest rate increased from 2.5% to 3% on his £75,000 mortgage, but his monthly bills fell by £564 because he extended his mortgage term from eight to 33 years.
“I paid an early repayment charge so that I could remortgage before rates rose any further.
It paid off as I secured a five-year fix that was far below the highs of 6% plus that other homeowners ended up getting,” says Michael.
“I decided to substantially extend my mortgage term to take advantage of the low interest rate.
“The money I’ve saved on mortgage repayments I’ve invested. I actively manage my investments and am earning more than the interest I’m paying on the mortgage.”
