Should I extend my mortgage to a longer term to lower the monthly payments?

Hardened homeowners and buyers are taking out longer mortgages in an effort to lower skyrocketing rates, new data shows.

The number of people taking out a mortgage with a term of 35 years or longer will peak at 88,059 in 2022 compared to just 40,471 in 2018 – an increase of 117 percent.

Financial firm Quilter examined mortgage data from the Financial Conduct Authority regulator, which shows how borrowers are trying to lower their monthly costs.

Homeowners have been hit by rising mortgage rates, some now above 7 percent.

While extending the term of a home loan reduces monthly mortgage payments, it also means that the total amount repaid increases.

Allowing homeowners to extend the term of their mortgage without hurting their credit was one of the pillars of the government’s recent mortgage statute, which went live earlier this month.

The package, agreed in partnership with many of the UK’s largest mortgage lenders, protects homeowners from repossession for 12 months from their first payment arrears and offers the option to switch to an interest-only loan for six months without penalty.

Mortgage prices are rising due to successive Bank of England rate hikes since December 2021, which are reflected in the price of new home loans.

That, coupled with historically high home prices, is forcing people to take out longer terms to lower their monthly payments.

There are also now almost four times as many people who take out mortgages with terms that they still have to pay off when they are in their 70s.

In 2022, there were more than 12,000 people over the age of 41 taking a term of 30-35 years.

By way of comparison: in 2018, only 3,035 over-41s took out a mortgage of this length.

The Bank of England base rate is now 5 per cent, and the average two-year fixed-rate LTV deal of 95 per cent is around 6.5 per cent, making it likely that even more people, regardless of age, will be forced to take out longer mortgage terms.

Karen Noye, Mortgage Expert at Quilter: ‘It is vital for anyone considering taking out a mortgage that will last them well into retirement that they think ahead and are aware of the potential risks.

‘Many people save too little for their retirement, without even taking into account that they will not earn and will have to pay a mortgage in addition to the cost of living.

Even though a mortgage with a term of 35 years or more can lead to lower monthly payments, you will probably pay significantly more interest over the life of your mortgage.

‘If possible, it’s always worth getting mortgage advice wherever possible to make sure you’re doing the best for your finances, as the cheapest deal isn’t always the most valuable, especially in the long run.’

We look at how easy it is to change your mortgage term and what the consequences are.

What does extending your mortgage mean?

The term of a mortgage is the time you have to pay back a loan. Shortening the term means that the loan is repaid in a shorter period of time, which increases the monthly costs.

By extending the term of your mortgage, you reduce the monthly costs because the loan is repaid over a longer period.

Mortgage lengths are usually 20 to 30 years, with borrowers often taking rates for two or five years.

It’s also important to remember that extending the term of the mortgage increases the total amount of interest you would have paid over the course of the loan, increasing your overall costs, even if it means short-term payments are more affordable.

Converting a £350,000 mortgage over 25 years to an interest rate of 6 per cent means payments of £2,256 per month.

Extending the term of the loan to 30 years reduces payments to £2,099 per month – a difference of around £157 per month.

However, if the term is 25 years, the total interest paid on the loan is £326,516.47, if the term is extended to 30 years, this will be increased to £405,433.66.

The additional five-year interest payments add nearly £80,000 to the total loan cost.

This means that any decision to renew must be made very carefully as it can be extremely costly in the long run.

> Use our True Cost Mortgage Calculator to find out how changing the term of your loan could affect your payments

Can you extend the term of your mortgage without needing a new loan?

There are no standard requirements for what to do if you want to change the term of your loan, as this varies from lender to lender.

Most will ask you to fill out a new application when you change the basics of a mortgage.

The lender wants to make sure you can still make the payments after the change, so it may be a longer process to shorten the term as your payments will increase.

Any changes from the original mortgage term will require a new mortgage application, which means a reassessment of your income, circumstances, credit report and lender’s criteria at the time of application.

In practice, this shouldn’t be a problem if your circumstances haven’t changed.

But if your income has dropped or a lender’s criteria have changed, your existing lender may not be able to offer you the same terms as before.

In this case, it may be more beneficial to take out a new mortgage with a new lender.

Nicholas Mendes, mortgage technical manager at mortgage broker John Charcol, said: ‘Most lenders will allow you to extend the term and keep the existing product you’re in, such as a fixed rate, although there will be some exceptions.’

This is the same if you want to undo the change later on, so it’s worth making sure the move is one for the long haul to avoid further complications.

Does extending your mortgage term mean penalties from lenders?

It is unlikely that changing your mortgage term will immediately result in you having to pay penalties.

However, if the change involves changes to the product, such as a rate change, you should speak to the lender to understand if you will be required to pay any prepayment fees as a result.

Does Changing Your Mortgage Term Affect Your Credit Score?

No, changing your mortgage term itself should not affect your score. However, if your lender needs another hard credit search, it will show up on your credit report.

That can make it harder to get decent terms on mortgages and loans.

It’s always worth asking lenders before making any changes, and you may not be able to use a broker for the process.

What has changed in the mortgage statute?

Lenders will likely be helpful in working with borrowers to renew their mortgage under the terms of the charter.

Borrowers also have more options to change the term of their mortgage.

Mendes adds, however, that the charter has changed little in terms of concrete borrower rights.

He added, “Anyone can already talk to their bank or mortgage lender, and just talking won’t affect their credit score. However, many borrowers do not realize this, so reinforcing the message is useful, but otherwise nothing changes.’