Should you get a 30 year or longer mortgage?

Houses

The length of a mortgage is typically 25 years, yet more people are considering borrowing money for longer to bring down the average cost of monthly repayments. But taking a 30 year or longer mortgage could end costing you a lot more money.

House prices rises might have slowed down, but they’re still very high in most parts of the country. To help combat increasingly large deposits, homebuyers are looking to lower their repayments as much as possible.

One way is for borrowers to increase the term of the mortgage.

Monthly savings from longer mortgage terms

Let’s assume you’re buying a £250,000 property at a rate of 3% and have a 30% deposit. Borrowing £175,000 over 25 years would cost you £830 a month. Adding an extra five years brings the monthly repayment down to £738, while a 35-year mortgage would only cost £673 a month. That’s £1,104 or £1,884 less each year.

The extra costs of long term mortgages

However, lowering your monthly mortgage repayments doesn’t always add up to overall savings.

Using the example above, over 25 years you’ll actually repay nearly £249,000 by the time you’ve repaid the initial debt. That’s £76,000 in interest.

Increase the term to 30 or 35 years and you’ll spend an extra £16,500 or £34,000 respectively over the full term you’ve borrowed the money.

Making sure you’ve extra flexibility

These added costs don’t mean you shouldn’t take advantage of lower repayments, especially if paying less each month is the only way you can afford to get on the housing ladder.

However, it’s worth checking the mortgage deal to see if you can overpay. Being able to do this without penalties gives you added flexibility if you get a pay rise or a cash windfall. You can also pay the contractual amount if times get tough.

It’s certainly worth thinking about as any extra money you put into your mortgage over your standard monthly amount will shorten the total length of the mortgage, saving you additional interest over the lifetime of the mortgage.

How old will you be when you finish the mortgage?

The longer the mortgage term, the older you’ll be when you make the final repayment. That might not be a problem as some mortgage providers have increased its limit to 80 years old, but you are less likely to be working and therefore bringing in as much money every month.

Of course, it’s not just long term mortgages you need to plan for. Any mortgage loan you apply for is going to be subject to some affordability tests to make sure you really can make the monthly repayments, even if circumstances change.

 


The above article  was originally published on the Money Advice Service blog on 1st August 2017