Younger homebuyers are amortizing their mortgage for at least 35 years, which amounts to a third of the total bill
- Homeowners are being forced to extend their mortgage terms to keep costs down
- But lowering how much you pay each month means a higher total bill
A quarter of homeowners under the age of 30 are now extending the term of their mortgage by 35 years or more, which amounts to 30 percent of their total bill.
The combination of high house prices, high mortgage rates and the increased cost of living means that many younger homeowners have resorted to extending the term of their mortgage beyond the standard 25 years in order to meet the repayments.
According to credit monitoring agency Experian, a quarter (25 percent) of home buyers under the age of 30 have a mortgage term of 35 years or more, an increase of 10 percent compared to the same period in 2020.
But moving away from standard 20- to 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 70s.
Long term: An extended mortgage term can make monthly payments cheaper, but borrowers pay more overall because interest has more time to accrue
James Jones, head of consumer affairs at Experian, said: ‘Our data suggests that people under 30 are looking for longer mortgage repayments to keep monthly repayments on their homes low, and this could also impact purchasing real estate among house hunters.
‘As high interest rates increase pressure on borrowers, young people may feel ‘trapped’. That’s why we’re encouraging people to think about ways they can get better deals based on their mortgage terms.”
Why do homeowners renew their mortgage?
To reduce monthly mortgage payments. By spreading the costs of a home loan over a longer period, you pay less per month, but more overall.
This means many will pay off their home loans well into their 70s in exchange for lower monthly mortgage payments.
For example, according to building society Nationwide, the average house is now worth £257,808, with the best five-year fixed mortgage rate hovering around 5 per cent.
Past the peak? Fixed mortgage rates are falling after a barrage of rate hikes in recent months
Mortgage rates have risen in response to steady increases in the Bank of England’s base rate, which was kept at 5.25 percent last month.
Someone buying an average-priced house with a 10 per cent deposit and a 5 per cent mortgage would pay £1,356.41 per month in home loan repayments over 25 years.
But delaying the term to 30 years would mean these payments would fall to £1,245.58 per month, or to £1,171.02 over 35 years.
Why do I pay more with a longer mortgage term?
Because the term of a home loan becomes longer, consumers pay back more interest.
That interest can increase the amount you owe your bank by a third.
Taking the example above, a 25-year homeowner would repay £407,070. But that rises to £448,591 over 30 years and £492,052 over 35 years.
For a 40-year home loan, repayments rise to £537,302 – 31 per cent higher than over a 25-year term.