Younger homebuyers dragging out mortgages for at least 35 years – adding up to a third to total bill
- Homeowners are forced to extend their mortgage terms to keep costs down
- But cutting how much you pay every month means a bigger overall bill
A quarter of homeowners under the age of 30 are now dragging out their mortgage term for 35 years or more – adding up to 30 per cent to their total bill.
The combination of high house prices, high mortgage rates and the increased cost of living mean many younger homeowners have resorted to extending the length of their mortgage beyond the standard 25 years in order to afford the repayments.
One quarter (25 per cent) of home buyers under 30 have a mortgage term of 35 or more years, according to credit checking firm Experian, up 10 per cent from the same period in 2020.
But the move away from standard 20-30 year mortgage terms comes at a cost, as homeowners pay more overall – and face the prospect of still repaying a home loan into their seventies.
Long haul: An extended mortgage term can make monthly payments cheaper, but borrowers pay more overall as interest has more time to rack up
Experian head of consumer affairs James Jones said: ‘Our data suggests that people under 30 are looking to secure longer mortgage repayment terms to help keep monthly repayments down on their homes, and this could also be affecting property buying among house hunters.
‘With high interest rates increasing the pressure on borrowers, young people may feel like they have been “locked in,” so we’re encouraging people to consider ways that they might be able to secure better deals on their mortgage terms.’
Why are homeowners extending their mortgages?
To lower monthly mortgage payments. By spreading the cost of a home loan out over a longer period, you pay less per month, but more overall.
This means many will be paying off home loans well into their seventies in exchange for lower monthly mortgage bills now.
Past the peak? Fixed mortgage rates are falling after a barrage of rate hikes in recent months
Mortgage rates have been rising in response to steady hikes to Bank of England base rate, which last month was held at 5.25 per cent.
Someone buying the average-priced house with a 10 per cent deposit and a 5 per cent mortgage would pay £1,356.41 a month in home loan repayments over 25 years.
But dragging the term out to 30 years would mean these payments would drop to £1,245.58 a month, or to £1,171.02 over 35 years.
Why do I pay more with a longer mortgage term?
Because as home loan terms get longer, consumers pay back more interest.
That interest can rack up how much you owe your bank by a third.
Taking the above example, a homeowner with a 25-year term would repay £407,070. But that rises to £448,591 over 30 years and £492,052 over 35.
For a 40-year home loan, repayments rise to £537,302 – 31 per cent higher than over a 25-year term.
What to do if you need a mortgage
Borrowers who need to find a mortgage because their current fixed rate deal is coming to an end, or because they have agreed a house purchase, should explore their options as soon as possible.
This is Money’s best mortgage rates calculator powered by L&C can show you deals that match your mortgage and property value
What if I need to remortgage?
Borrowers should compare rates and speak to a mortgage broker and be prepared to act to secure a rate.
Anyone with a fixed rate deal ending within the next six to nine months, should look into how much it would cost them to remortgage now – and consider locking into a new deal.
Most mortgage deals allow fees to be added the loan and they are then only charged when it is taken out. By doing this, borrowers can secure a rate without paying expensive arrangement fees.
What if I am buying a home?
Those with home purchases agreed should also aim to secure rates as soon as possible, so they know exactly what their monthly payments will be.
Home buyers should beware overstretching themselves and be prepared for the possibility that house prices may fall from their current high levels, due to higher mortgage rates limiting people’s borrowing ability.
How to compare mortgage costs
The best way to compare mortgage costs and find the right deal for you is to speak to a good broker.
You can use our best mortgage rates calculator to show deals matching your home value, mortgage size, term and fixed rate needs.
Be aware that rates can change quickly, however, and so the advice is that if you need a mortgage to compare rates and then speak to a broker as soon as possible, so they can help you find the right mortgage for you.