Martin Lewis talks about rising interest rates on mortgages
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Buyers are increasingly taking out mortgages over a 40-year term, rather than the traditional 25 years, to keep their purchase affordable as house prices rocket. This means they may struggle to pay off the debt before they retire and their income falls.
Six in 10 mortgages now offer buyers the option of stretching their repayments over 40 years, according to Moneyfacts.
Halifax, Barclays, Santander and Nationwide all now offer 40-year terms as an option, as do many building societies including Newcastle, Leeds and Hinckley & Rugby.
NatWest and Virgin Money stretch to 35 years.
As first-time buyers typically now wait until their 30s to get on the property ladder, 40-year mortgages could run into their 70s.
While a longer mortgage term shrinks monthly interest repayments, owners pay a lot more interest in total.
One in six homeowners already fail to pay off their mortgage before retirement, research from Hargreaves Lansdown show.
The cost of living costs will make matters worse, by reducing the amount people can afford to pay on their mortgage each month.
Lengthening the term on a capital repayment mortgage cuts costs and provides breathing space, says David Hollingworth, broker at L&C. “It is particularly useful for first-time buyers struggling to get on the property ladder.”
But it comes at a cost. “The total interest paid over the life of the mortgage will rise dramatically, typically by tens of thousands of pounds.”
Someone who borrowed £150,000 over 25 years at two percent would face repayments of £635.78 a month.
Stretching their mortgage term to 40 years would reduce that to £454.24, a saving of £181.54 a month.
However, because they are repaying the debt over an extra 15 years, their total interest charges would shoot up.
Over 25 years the total interest payable would be £40,734, but across 40 years it would hit £68,035.
That is £27,301 more.
Hollingworth says buyers who take out a longer mortgage term should aim to cut it back later or risk failing to clear the debt before they retire.
They could either remortgage to a shorter term, or overpay to shrink their debt and save interest. “Most lenders now allow you to overpay by up to 10 percent a year without penalty, which would cut your interest charges over the life of the loan.”
Those who don’t risk losing their home, Hollingworth warns: “If the mortgage balance doesn’t reduce borrowers could be forced to sell their home to repay the debt.”
As inflation, taxes and house prices rise, more people are likely to resort to longer mortgage terms, says Rosie Fish, mortgage expert team lead at broker Habito.
She fields regular enquiries from remortgage customers seeking to increase their term to cut monthly repayments. “While this lowers costs in the short-term, it’s more expensive in the long run.”
Fish also urges homeowners to overpay their mortgage if they can, as the savings may be bigger than they expecte.
Somebody with a £200,000 mortgage charging 2.5 per cent over 40 years would pay £660 a month, Fish says. “If they regularly overpaid by £100 each month, they would clear their debt eight years earlier, and save £26,335 in total interest.”
Before overpaying, watch out for for early repayment charges, usually imposed in the first years of fixed rate or discounted deals. “These can cost you thousands of pounds,” Fish cautions.
In that case, wait until they have expired before overpaying.
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