The old days of mortgages lasting for 25 years are on their way out as lenders react to rising house prices and the squeeze on borrowers.
Until recently you had no choice about how long you had a mortgage for. You paid it back in 25 years or else. However our research shows the market has changed dramatically.
Now more than a third of mortgage lenders will offer terms of 40 years or more. Some will even lend for as long as 52 years. Put simply the longer you take to pay off your mortgage the less you will pay each month. But it’s not quite that simple.
You need to pay it off sometime
At the most basic level, mortgages fall into two categories: repayment and interest-only. With a repayment mortgage, you pay off your mortgage bit by bit every month.
With an interest-only mortgage, the borrower only pays the interest, but usually with a view to paying off the original amount borrowed at the end of the mortgage term. If you are only paying interest then that cuts the amount you pay each month.
Of course you also need some way to pay off the debt. That means having a savings plan in place, such as an investment ISA, or a pension scheme.
The problem with the pension option is that you have to wait until you retire until you can claim your tax-free lump-sum to pay off your mortgage. But the advantage of both ISA and pension options is that the tax breaks you receive help you repay your mortgage.
The earlier the better
These days, most lenders allow you to make lump-sum payments to reduce your mortgage. This can be limited to a certain proportion of the debt, such as 10% per annum. This applies to both interest-only and repayment deals. Some mortgages allow you to pay off as much as you want.
If you have a repayment mortgage you can also significantly reduce the amount of interest you pay by many thousands of pounds by opting for an early repayment scheme.
This will mean that you monthly payments will be higher than you currently pay but will save you thousands of pounds in interest payments by reducing the term of a mortgage from 25 years to say 20, 15 or even 10 years, for example. If you can afford the higher repayments, it is a very attractive option.
The two year mortgage merry-round
It is now quite rare, and often inadvisable, to stick with one company for the length of your mortgage.
While a mortgage might nominally be for 25 or 40 or even 52 years, the fact is that you should be looking to re-mortgage every few years.
There are always good deals coming onto the market and it is unlikely that your mortgage will always be the best deal for you, even if that was the case when you first took it out.
Reducing your interest repayments might also leave more money available to pay off more of your mortgage debt.
The basic point is that if you take out a 40-year mortgage your repayments could be around £100 a month lower than for a 25-year mortgage. If after five or 10 years you can afford to pay more you can make lump sums payments or even cut the length of the mortgage.
The danger though is that the longer you take to repay your mortgage the more it costs in interest.
On a £100,000 mortgage at 6 per cent you’d pay £93,200 in interest over 25 years. Over 40 years you’d pay £164,100 in interest. That’s a £70,000 difference. And remember you might not want to be working well into your 60s or even 70s to keep up payments on your mortgage.
When does it end?
In theory, you could keep re-mortgaging, although in practice, lenders will be unlikely to allow you to have a mortgage past retirement. They will look at your circumstances and set a limit to when they expect the mortgage debt to be paid off.
First, use our calculator to find the best mortgage interest rate for your circumstances. Then complete our simple online form to arrange for Mortgage Advice from a Qualified Mortgage Adviser.
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