- Higher interest rates force borrowers into longer mortgages to reduce monthly payments ….
…but borrowers risk paying far more interest over the long term
The number of mortgages that last more than 30-years that have been sold to UK borrowers has jumped 13% in the year to September 30th, from 459,296 in 2021/22 to 520,779 in 2022/23, says Bowmore Financial Planning.
30-year mortgage terms allow borrowers to reduce their monthly payments by repaying the amount they owe over a much longer period. However, whilst monthly payments become more affordable the total amount paid in interest payments will increase substantially.
Bowmore says that increase in interest rates has led more homeowners to look at these much longer-term mortgages as a way of keeping their monthly mortgage payments affordable.
Borrowers taking out a 25-year mortgage to the buy the UK’s “average” (property worth £288,000) at the current average interest rate will pay £1,675.18 per month. Borrowers taking out a 40-year mortgage with the same deposit amount will pay £1,430.56 per month. However, whilst monthly payments are lower, longer-term borrowers will pay 29% more during the term of their mortgage. 40-year mortgage holders will pay a total of £572,000 compared to £442,000 for 25-year mortgage holders.
The figures on the sales of these longer-term mortgages, supplied by the Financial Conduct Authority to Bowmore show that the number of 40-year mortgage sales has increased 29%, from 1,533 in 2021/22 to 1,980 in 2022/23.
Charles Incledon, Director at Bowmore Asset Management, says: “The number of people opting for longer term mortgages has caused concern at the Financial Conduct Authority.”
“The worry is that some borrowers haven’t fully understood the potential impact 30-40-year mortgages could have on their long-term finances. They will be quite an additional amount in interest.”
“When interest rates are low, monthly mortgage payments are easier to manage for borrowers. With interest rates at their current level, 30–40-year deals maybe tempting to those struggling with the cost of living.”
“Not only will borrowers be paying much more in the long term, but they are also taking funds away from their retirements. Missing out on that money for so many years can make a measurable difference to the size of a retirement pot.”
Over 30- year mortgage sales increase 13% in the past year
Source: Financial Conduct Authority
Calculation based on a 10% deposit for the UK average house price of £288,000 – Source: Money Helper
Calculation based on a 10% deposit for the UK average house price of £288,000 – Source: Moneysaving Expert
