Should I extend my mortgage?
BY READERS DIGEST
1st Jan 2015 Managing your Money
The days when homeowners took out a mortgage with a view to paying off the debt over a 25-year term may be over. Harvey Jones investigates.
Going in for the long haul
Growing numbers of first-time buyers are taking out mortgages running for extended terms of 30 or 35 years instead, in a bid to reduce their monthly repayments and get on the property ladder sooner.
There are benefits to a longer mortgage term run but be warned, there are also costs.
Let's talk terms
One in four new mortgages is now taken out over a 35-year repayment term, according to Halifax, up from just 16% in 2007.
A longer mortgage term will cut your monthly repayments because you are paying off the capital over several more years.
The lower payments also boost your chances of passing the lender’s affordability criteria and getting a mortgage in the first place.
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Benefits and costs
For younger borrowers, there are clear benefits to extending the mortgage term, but also costs.
Someone taking out a £200,000 mortgage over 25 years at 3 per cent would face capital and interest rate payments of £948 a month.
If they extended that loan to 35 years instead the cost would fall to £770, saving them £178 a month.
This could make the difference between qualifying for the mortgage and being turned away.
The downside is that over 25 years interest charges would total £84,478, but that would rise to £103,495 over 30 years, costing an extra £19,017.
Over 35 years the interest would total £123,201, an extra £38,723. So extending your mortgage term isn't cost free.
Read more: What your mortgage provider won't tell you
Ideal mortgage solution
One option is to take out your mortgage over a longer term to cut your initial costs then, when you have more money to spare later, make overpayments or slash your term.
That way you enjoy the initial savings from an extended mortgage term, while reducing the back-end expense.
Quite a stretch
Many older homeowners are also stretching out their mortgages as they struggle to fund the debt in later life.
This applies to hundreds of thousands of borrowers who took out interest-only mortgages in the 1980s and 1990s backed by an endowment plan that underperformed and left a shortfall.
Someone who owed £50,000 on a five-year term would pay £898 a month at 3 per cent, but this would fall to just £345 a month if extended over 15 years instead.
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Long loans
The big problem with extending your loan in later life is that many lenders are reluctant to allow people to borrow beyond age 65.
They are slowly becoming more flexible, with Halifax recently announcing that it will give borrowers up to age 80 to pay off their debt, with Nationwide running to 85.
Many smaller building societies may lend to 90 and beyond.
The catch is that you must prove you can service your mortgage from income such as pensions and investments.
An independent mortgage broker can help you come to the right decision, whatever your age.
Reade more: Can you get a mortgage if you're over 80?
