With the cost of living biting, many homeowners and buyers are looking to extend their mortgage terms to 35 or 40 years to keep their monthly repayments lower.
In the last year, there’s been a 10% rise in the number of mortgage applicants choosing a 40-year mortgage term.
And 38% of all mortgage applicants are now opting for 30-35 year mortgage terms.
With property values increasing more quickly than salaries, shorter mortgage terms have become unaffordable for many first time buyers.
And 67% of all mortgages currently on the market allow up to 40-year terms.
However, experts at Uswitch are warning buyers to exercise caution when considering so-called ‘mammoth mortgages’.
How much extra interest do you pay with a 35-year mortgage?
If you were to borrow a mortgage for £250,000 (the average UK property price) with a 25% deposit, here’s what you’d pay in interest over 35 years.
The figures below are based on a fixed-rate mortgage, reverting to 4% after 4 years.
Mortgage interest payments for 35-year mortgages
Mortgage interest rate | 25-year term | 35-year term | Difference in interest |
4% | £109,000 | £161,000 | £52,000 |
5% | £118,000 | £170,000 | £52,000 |
6% | £126,000 | £179,000 | £53,000 |
So, if you took out a 6% fixed rate mortgage, over a 35-year term you’d be paying the bank £179,000 in interest.
That’s 71% of your original £250,000 property price, paid again, in interest.
It’s also £53,000 more than you’d pay at the same 6% mortgage rate for a 25-year mortgage term, where the interest paid would be £126,000.
With a 5% fixed rate mortgage, you’d be paying the bank £170,000 in interest over a 35-year term.
That’s £52,000 more than you pay in interest for a 25-year mortgage at the same rate, where the interest would be £118,000.
With a 4% fixed rate mortgage over a 35-year term, you’d pay £161,000 in interest.
That’s £52,000 more than you’d pay if the mortgage term were set to 25 years, where you’d pay £109,000 in interest.
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How much extra interest do you pay with a 40-year mortgage?
If you were to take out a 40-year mortgage for £250,000 using a 25% deposit, here’s what you’d pay in interest over 40 years.
The figures below are based on a fixed-rate mortgage, reverting to 4% after 4 years.
Mortgage interest payments for 40-year mortgages
Mortgage interest rate | 25-year term | 40-year term | Difference in interest |
4% | £109,000 | £189,000 | £80,000 |
5% | £118,000 | £198,000 | £80,000 |
6% | £126,000 | £206,000 | £80,000 |
So, if the mortgage rate was 6%, you’d essentially be paying £206,000 in interest for a £250,000 property.
That’s 82% of your original property price, paid again, in interest.
If the same mortgage were taken out over 25 years, you’d pay £80,000 less in interest - a total of £126,000.
With a 5% mortgage rate paid over 40 years, you’d pay £198,000 in interest.
That’s £80,000 more than you’d pay with a 25-year fixed rate mortgage term, where the interest would amount to £118,000.
And even with a 4% mortgage rate, you’d be paying an extra £80,000 in interest compared to a 25-year mortgage term. That’s £189,000, as opposed to £109,000.
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What are the advantages of taking out a longer term mortgage?
Despite the vast differences in interest payments, there are certain circumstances where it can be advantageous to take out a longer mortgage term.
You may be more likely to meet your lender’s affordability criteria, as your monthly repayments will be lower.
A longer term mortgage could enable you to borrow more, meaning you don’t have to save up such a big deposit to secure the home you want.
If you’re expecting to receive an inheritance in the future, you may want to keep your monthly repayments lower for now, and then pay off the balance of your mortgage in a lump sum later.
If you’re in a career where you’re expecting to progress quickly financially, a longer-term mortgage could help in the early stages of buying a property - and you could then shorten the mortgage term once you’re earning more cash.
Finally, you may simply want to keep your payments lower for now, so that you can spend more of your monthly income on enjoying your spare time.
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Why are longer term mortgages proving more popular right now?
According to the Office for National Statistics (ONS) earnings have doubled since 1997, whereas house prices have increased four-and-a-half times.
If a first-time buyer earning £36,000 wanted to buy a home for £288,000, they would need to borrow eight times their annual income.
As most lenders will lend up to 4.5 times your annual income (equating to £162,000 for someone earning £36,000), this leaves a massive shortfall.
To meet lender affordability criteria, first-time borrowers will therefore need a very large deposit, or a very long time to repay the loan.
With the cost of living crisis squeezing everyday finances and making saving a large deposit even more difficult to achieve, a longer mortgage term has become the only option for many.
How much lower would my monthly mortgage payments be with a longer mortgage term?
For a £250,000 mortgage, extending your mortgage term can make a substantial difference to your monthly repayments.
The figures below are based on a fixed-rate mortgage, reverting to 4% after 4 years.
Monthly mortgage payments for longer term mortgages
Mortgage interest rate | 25-year term | 35-year term | 40-year term |
4% | £989 | £830 | £783 |
5% | £1,096 | £946 | £904 |
6% | £1,208 | £1,069 | £1,031 |
At a 4% interest rate, the monthly repayments for a 40-year mortgage term are £206 less than for a 25-year mortgage.
At 5%, the monthly repayments for a 40-year mortgage are £192 less than for a 25-year term.
And at 6%, the monthly repayments are £177 less than for a 25-year term.
So, a longer mortgage term might help you to step onto the property ladder, or reduce your monthly payments in the short term.
But overall, the shorter the mortgage term you can afford, the better.
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