The rise of the 35 year mortgage: First-time buyers extend their home loans, but is better cash flow now really worth the £9,000 in extra interest?

Many first-time buyers are turning to a longer term 35 year mortgage rather than traditional 25 year terms.

Last year a quarter of mortgages were over a 35 year mortgage term, which has increased massively from 16 per cent in 2007, Halifax data has shown.

Over the same period 35 year mortgage terms grew in popularity, the share of 20 to 25 year mortgages dropped from 48 per cent to 30 per cent, according to the data revealed by Halifax.

Lower monthly repayments over a longer period could increase a borrower’s chance of application success, but you could then end up paying more than £9,000 extra on a typical home loan over the 35 years.

Homebuyers traditionally took out 25 year mortgages but the increase in house prices and stricter affordability criteria have pushed lenders and brokers to encourage longer terms.

Obviously, the longer the mortgage term, the cheaper the repayments will be as they are spread over a longer period. However, you should bear in mind that you will have the burden of the debt for more years and end up paying interest for longer, which increases the overall cost of the mortgage. The only way around this is to overpay your mortgage or regularly remortgage to benefit from lower interest rates.

How much could you save with a longer 35 year mortgage term?

As previously mentioned, the longer you take out a mortgage for, the cheaper the repayments will be as you are spreading them out, but you also pay the interest for longer.

For example:

A two-year fixed rate on the market at 60 per cent loan-to-value is 1.14 per cent with a £1,475 fee.

Over 25-years, a £150,000 mortgage would cost £574.87 a month and £173,934 over the lifetime of the loan.

However, by extending the term to 35 years it reduces repayments to £433 and gives a total cost over the lifetime of loan of £183,455.

Therefore, you technically end up paying £9,521 more over the life of the product by taking it out for ten years longer.

This amount can be decreased by overpaying and borrowers are also likely to remortgage to a different fixed rate at the end of a deal term. This should change the monthly repayments and hopefully pay down the debt quicker. By remortgaging it also gives the borrower chance to reduce the term of the loan, for instance if their financial circumstances have changed they may prefer to pay the debt off sooner.

Should you take out a 35 year mortgage? 

Brokers favour longer term mortgages to help potential buyers onto the property ladder.

Deciding between a 25 and 35 year mortgage term could be the difference between refusal and acceptance for a borrower. The bank may want the security of more repayments before they make an offer.

But this only really works if you’re prepared to overpay when you can and remortgage onto new rates at the end of your fixed rate period. This should help to keep your costs down and reduce the overall term.
Post courtesy of This is Money.