Mortgage rates are rising, and many homeowners are scrabbling around for ways to make their mortgage payments more affordable. This means longer term mortgages are becoming more common, but buyers need to be aware of how much more this will cost them.

WHAT’S THE LOGIC

Most people take out a mortgage with a 25-year term, meaning that they repay the loan over 25 years. But you could pick a term anywhere from five years up to around 40 years, depending on your lender. By extending the term of the loan, you reduce your monthly repayments. This is because you’re repaying the loan over a longer period, and so at a slower rate. However, you’ll be charged more interest in the long term, because you’re borrowing money for longer.

HOW MUCH LOWER WILL MY REPAYMENTS BE?

With interest rates having risen, this will push up monthly repayments – extending the term is one way of counteracting that. Someone buying a £350,000 home with a 10% deposit could reduce their monthly repayments by £600 by extending the term from 20 years all the way out to 40 years. Even extending the term by five years, from 25 to 30 years, would reduce monthly repayments by £163 – so almost £2,000 a year.

At a higher level of borrowing the savings are greater. Someone buying a £600,000 home with a 10% deposit would pay £278 a month less by extending the term from 25 year to 30 years, or £471 a month by extending it by 10 years to 35 years – a saving of more than £5,600 a year.

BUT HOW MUCH MORE WILL IT COST?

The impact of extending your term on the total cost of your borrowing is pretty dramatic, particularly if you’re borrowing a large amount. The total interest costs mount up as you extend the term, so that you pay more than double the interest at 40 years than you do at 20 years. Someone borrowing to buy the £350,000 property over 25 years would pay total interest of around £158,000, while increasing that term to 35 years would add an extra £74,000 to  the bill.

On the £600,000 property you would pay total interest of just under £212,000 over a 20-year term, but total interest of £464,000 over 40 years. Even increasing the term from 25 to 30 years means you face an extra £62,000 in interest costs.

WHAT THINGS SHOULD I CONSIDER BEFORE EXTENDING?

If your main focus is getting on the property ladder as soon as possible extending the term could still be a good option, but you just need to have your eyes open to how much more it’s going to cost you. Your broker should be able to advise you how much extra you’ll end up repaying over the term of the mortgage, based on your exact deal. If you’ve not already exhausted your budgeting options then it might be a good idea to see if you can make any other cutbacks to your spending so you can afford a higher monthly mortgage repayment, and so a shorter term.

Often first-time buyers will take a longer term on their first mortgage with the intention to reduce it later on, when they remortgage, but that doesn’t always become the case. That means that lots of people could end up paying a mortgage right until they retire – or even having to work longer than they wanted just to afford their                     mortgage repayments.

You also need to think about the impact it might have on your retirement savings – if you’re paying a mortgage up until retirement that will leave you with less disposable income to put towards  pension saving.

However, for people who have more uncertain incomes taking a longer term could be a good option so they know they won’t struggle to make their mortgage payment even on leaner months. Then if they do have spare cash they can overpay, and so reduce their total cost. Most mortgage lenders let you overpay by 10% of the outstanding amount left on the mortgage, but just check before you make any payments.

DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (Laura Suter) and the editor (Tom Sieber) own shares in AJ Bell.

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