You’d have to have been hiding under a rock not to know that mortgage rates have risen, meaning that most people coming to the end of their fixed term deal are facing a huge increase in their monthly mortgage costs.

Based on UK Finance figures there are around 800,000 homeowners coming to the end of their fixed rate in the second half of this year, and around 1.6 million deals are due to end in 2024.

As a result, lots of homeowners are extending the term of their mortgage – roughly speaking the longer the term of the mortgage, the lower your monthly repayments will be. By the end of 2022, well over half of first-time buyers and a third of home movers were borrowing on mortgages with terms of over 30 years, UK Finance figures show (previously the industry norm has been up to
25 years).

But the short-term win can cause long-term pain, as homeowners will be paying more overall and could end up paying their mortgage off into retirement. So, what things do you need to consider before going longer?

CONSIDER THE COST

First up, the cost. While extending a term can really reduce your monthly repayments, it does mean that you’re borrowing money for longer and so paying more interest. You might think it’s just a few quid but it really adds up. Let’s take some examples. Someone who borrowed £250,000 at an average interest rate of 3% on a 25-year term will pay just under £106,000 interest overall. However, if you extend this term by 10 years you’ll pay just over £154,000 in interest – £48,000 more.

On £400,000 of borrowing these figures are amplified. Borrowing over 20 years would cost a total of almost £132,500 in interest over the term but extending that term to 40 years would mean the cost rockets to £287,000 – almost £155,000 more in interest costs.

RATES COULD STAY HIGHER FOR LONGER

As the tables show, there’s no denying that extending the term works well to reduce your monthly costs. People might currently be planning to extend the term temporarily, while interest rates are high, and then reduce it once they come to remortgage.

However, with markets now predicting interest rates will stay higher for longer, rates may not have dropped dramatically by the next remortgage. Some homeowners also need to think about whether they are likely to have good intentions of cutting their mortgage term but then fail to actually do it in the future.

The other factor you need to consider is what you’ll do if you hit payment problems in the future. Currently mortgage companies are being encouraged to be lenient with customers who are struggling with repayments, amid the cost-of-living crisis or because their mortgage costs have shot up (or both).

One of the options to help customers is extend the term of the mortgage. However, if they are already at the limit, and can’t stretch the term any further, they could end up with fewer options if they do fall into financial hardship further down the line.

A BURDEN IN LATER LIFE

The other factor to consider is how people will handle paying off this debt later in life. If you take out a mortgage in your 30s and extend the term to 30, 35 or even 40 years, that means you’ll be repaying it past the age you might have planned to retire.

Previously mortgage companies were very strict with their age cut-offs for customers, but they have become more relaxed in recent years. This means some will let your mortgage end when you’re 70, 75 or even older for some niche lenders. If your mortgage is running for this long, you need to factor this into your retirement plans.

If you’re still paying a mortgage you might need to delay retirement until it’s paid off. Equally you should consider the impact it will have on your ability to save elsewhere – if some of your income is going towards your mortgage that is money you can’t funnel into your pension or other savings. It’s another example of how saving in the short term can have long-term impacts.

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