If you have a standard repayment mortgage, you may be able to reduce your monthly payments by extending your mortgage term. Your mortgage term is the length of time that you have agreed to fully repay your mortgage within. The term will have been agreed with you at the time you originally took your mortgage out, or last remortgaged it.
For a long time, a 25-year mortgage term was the standard go-to option. In recent years, however, as the size of the average mortgage has increased, there has been a move towards longer repayment terms in an attempt to make the higher borrowing needed to buy a property more affordable. In fact, data suggests that the number of first-time buyers opting for a mortgage term of between 35 and 40 years has doubled over the past decade.
So, how does extending your mortgage term affect your payments, and is it something you should consider?
How does extending my mortgage term affect my repayments?
Extending your mortgage term will generally make your monthly repayments lower, leaving you with more disposable income each month. This is assuming that you don’t get moved onto a higher interest rate deal at the same time as extending the mortgage term, as the higher interest charge will probably negate some or all of the benefit of a longer repayment term.
By spreading the repayment of the mortgage over a longer period, the monthly cost of your repayment falls. Think of it like borrowing £100 from a friend and agreeing to pay it back over ten weeks at £10 per week. If your friend agrees to be paid over twenty weeks instead, it will then only cost you £5 per week.
With this in mind, extending your mortgage term could be an attractive option if you are struggling to make your mortgage repayments, or if your financial situation has suddenly changed.
Whilst lower monthly mortgage repayments sound great, one of the drawbacks is that you will be paying your mortgage off for a longer period. For this reason, it’s important to consider your age before committing to this strategy. If you are currently middle-aged or older and you extend your mortgage term, you could well be still making mortgage repayments beyond your planned retirement age. This is a time when most people’s incomes reduce as they draw on their pensions, so you will need to make some provision for the continuing cost of mortgage repayments in your budget.
Alternatively, you might also want to consider reducing your mortgage term at some point. This has a similar effect to extending it but in reverse. A shorter mortgage term makes your monthly repayments higher as you are spreading the total repayment of the mortgage over a shorter period. You do, however, pay less interest in total over the new shorter term of the mortgage.
Longer mortgage terms mean more interest
One impact of extending your mortgage term and therefore paying off your mortgage over a longer period is that you will increase the total amount of interest that you end up having to repay during the lifetime of your mortgage. This is because your borrowing will last for longer and the loan amount will reduce more slowly.
For instance, let’s assume that you buy a house with the help of a mortgage of £150,000 at a current interest rate of 2.5%. If you opt for a 25-year mortgage term, then your monthly repayments will sit at around £678 a month. Assuming that interest rates don’t change during the life of your mortgage, your total repayments over the whole 25 years will amount to £203,400 of which around £53,400 is the interest charge.
If, however, you opt for a longer mortgage term, at say 30 years, those monthly payments fall to £597, but the total repayment cost over the 30 years will be £214,920 of which £64,920 is interest. Similarly, a 35-year term would reduce monthly repayments on the same mortgage down to just £540, but the total amount you would repay over the longer term would be £226,800 of which £76,800 is the interest charge.
If you have extended your mortgage term at some point during its lifetime, you might look to reduce the term back again later on, or perhaps even overpay your mortgage when your finances are stronger and the increase in monthly cost is more affordable to you. The advisers here at Mortgage Light will be happy to discuss these options with you, should you want to consider them.
How do I extend my mortgage term?
If you already have a mortgage in place and you would like to extend the repayment term to benefit from reduced monthly repayments, you can usually apply to do this at any time, although lenders will not generally consider this during any initial fixed or discounted interest rate period of the borrowing. At Mortgage Light, we will be able to help and guide you through the process.
We will work with your current lender to assess the suitability and affordability of this amendment to your mortgage deal. This may involve asking you to provide some confirmation of your current income, as well as confirmation that the borrowing will still be affordable to you if the extended term takes repayments beyond your anticipated retirement age.
Your lender may not allow you to extend your mortgage term if:
- The property is currently being let
- Any part of your mortgage is interest-only
- You are more than one month in arrears with your current mortgage payments
- You or anyone else on the mortgage has been declared bankrupt
- There is a guarantor on the mortgage
- You want a mortgage term longer than 40 years
- The term is extended past the 75th birthday of the oldest borrower
Should I extend my mortgage term?
Whether or not extending your mortgage term is the right thing for you will depend entirely on your own personal and financial circumstances, as well as the mortgage deal you currently have. You need to weigh up the advantages and disadvantages of the options available to decide whether those lower monthly repayments are worth the extra amount of interest that you’ll end up being charged.
It’s a comfort for many to know that a mortgage term can be changed along the way if needed. However, changing your mortgage term will have an impact on your financial situation, so it’s really important that you understand your options.
Before you make any decisions, speak to us here at Mortgage Light. It is well worth having an expert on your side to ensure that your mortgage is working for you. Please contact us today by filling out our online enquiry form, or calling 01908 597655.