Opting for a longer mortgage term can mean more affordable monthly repayments, but it comes with a significant cost later down the line.
The average mortgage term taken out by first-time buyers stands at 30 years.
And with the average buyer getting on the property ladder at the age of 33 and eight months, it means they won’t expect to be mortgage-free until the age of 63 and eight months.
The data from mortgage broker Mojo Mortgages, however, also revealed that for Londoners, they can expect a longer wait to buy a first property, with the average age of buyers standing at 36 years and eight months.
This is in stark contrast to those in Wales, who are the youngest (31 years old) when it comes to getting on the property ladder.
Buyers in the capital also need a significant deposit to help them buy, at an average of £108,808. This compares to £29,740 for those buying in the North East.
With deposit hurdles and higher mortgage interest rates, one way of making the dream of homeownership a reality is to extend the term of the mortgage.
This allows you to pay a smaller amount each month to service your mortgage, but you’ll be tied to the mortgage for longer, meaning higher overall interest charges over the life of the loan.
In fact, Mojo Mortgages’ data revealed that extending a mortgage by a decade, from 25 to 35 years, can cost the average first-time buyer an extra £87,180.
John Fraser-Tucker, head of mortgages at Mojo Mortgages, said: “Our research has found with the current average mortgage rate for a two-year fix (75% LTV) at 5.44%, the total cost of an average-priced house (£285,000) varies significantly on the loan term.
“For a 25-year loan term, the total mortgage cost would be £391,200, which includes the principal amount and interest charges. 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.”
Based on the average mortgage rate and house price, extending your mortgage rate by one year can cost an additional £8,472. By two years, it can cost an additional £17,040, and for those looking to extend the term by five years, it can cost an additional £42,600.
Significant regional variations
However, for Londoners, it could cost an extra £160,000 to extend the term from 25 to 35 years. This move will reduce monthly payments by £304, but it adds a staggering £158,840 to the total mortgage cost. Mojo revealed that on a typical London property priced at £523,376, this means paying £878,640 over 35 years instead of £718,800 over 25 years.
The table below reveals the regional variations in the payment difference when extending a mortgage term by a decade (based on average regional prices):
Fraser-Tucker added, “Our research highlights the importance of considering the long-term financial implications when choosing a mortgage term. While the monthly savings of a longer term may seem attractive, the substantial increase in overall cost could significantly impact future financial planning, including pension contributions and retirement lifestyle.”
Mojo highlighted that beyond paying more overall, mortgage borrowers may be forced to use their hard-earned pension funds to pay off their outstanding mortgage balance upon retirement, “undermining their financial security in their golden years and increasing the risk of poverty in old age”.
It added that “in less extreme cases”, longer mortgage terms may deprive borrowers of an important period leading up to retirement when they could have been mortgage-free.
“This window of opportunity can be used to boost pension contributions or to enjoy experiences and activities that may not have been possible during their working years,” the broker said.
This article was first published on Mortgage Solutions‘ sister site, YourMoney.com. Read: Extending a mortgage term by 10 years costs first-time buyers £87k
Paloma Kubiak is an award-winning journalist with 15 years in the trade. She has the NCTJ qualification in media law and Government, and gained a bursary to undertake the Press Association training where she passed 120wpm in shorthand. Paloma started her journalism career at local paper, the Ealing Gazette and Leader series just at the onset of the global financial crisis. During her time at the paper, she was promoted to senior multi-media journalist.
In 2011, she joined MoneySavingExpert.com as a deals researcher and writer, before moving to the news team as a reporter covering personal finance. She was runner up in the Santander FinCon Media Awards 2014 in the ‘best newcomer’ category.
In 2016, she joined YourMoney.com as a reporter. Commended in the 2017 Unbiased Media Awards 2017 for the ‘Best Value of Advice’ article, she then went on to win ‘Household Money Journalist of the Year’ at the 2017 Headline Money Awards. Paloma was also included in the UK’s ‘Wonder Women in Finance’ in the same year, compiled by Finder.com.
She has been writing about and researching personal finance for the past decade and is editor of YourMoney.com.
