Taking A Longer Mortgage. Why It Could Make Financial Sense

Money Saver PeteFinancial HealthLeave a Comment

longer mortgage

If you’re looking at buying a new home or remortgaging, then having a longer mortgage could give you more flexibility and it doesn’t have to cost you extra.

86% of Brits dream of owning their own home. And who can blame them? Imagine the extra money you would have at the end of the month without any mortgage or rent payments.

Unfortunately, mortgage debt is on the increase, but this isn’t a surprise when you consider the silly prices that houses are selling for. And because we’re borrowing more, it makes it even more important what we pay back is affordable and manageable should interest rates rise.

The ultimate goal

If you have a mortgage, you’ll know the fewer years you have to pay off, the better it feels. That’s why it’s tempting to reduce the term if you can afford to pay more. After all, why pay it off for longer than you need to?

But don’t rush in quite just yet. Think about taking a mortgage out for longer with lower payments.

Why take a longer mortgage?

Flexibility. The longer the mortgage term, the lower the monthly payments will be. In the majority of cases, you aren’t restricted to just paying the set amount each month that you agreed to when you took out your mortgage. The majority of lenders will allow you to make 10% worth of overpayments each year.

Take a look at the table below for payment cost on mortgages between £100,000-£200,000 with an interest rate of 2%.

£100,000 £150,000 £200,000
15 Years £644 £965 £1,287
25 Years £424 £636 £848
30 Years £370 £554 £739

Let’s say somebody has a mortgage for £150,000 and a maximum budget of £1000 to make their monthly payment. They could afford to pay off their mortgage in just 15 years, leaving £35 spare each month. This, obviously, doesn’t leave much in the way of cash in an emergency. But extend this to 25 years and the cost lowers to just £636, giving them £314 spare per month.

Won’t it cost more?

Not necessarily. As long as you stay disciplined, overpay by £314 each month, then you will still finish your mortgage within 15 years. The advantage is, if you have an unexpected bill, you will be able to take some money from that month’s mortgage overpayment.Mortgage over a longer term

What to look out for
Make sure that the lender allows overpayments without penalty. As I said earlier, the majority of mortgage providers allow you to pay an extra 10% each year without fees.
If your mortgage is quite small, then taking your mortgage for longer may not be suitable.
When you make an overpayment, let your lender know that you would want your term reduced. Most mortgage companies reduce your standard monthly payment when you pay an extra amount.

Just make sure that if you take a longer mortgage, you remember to keep making the overpayments when you can, and not to spend it on luxuries!

Where next?

If your current mortgage deal is due to end, or you’re currently on a Standard Variable Rate, take a look at your bank’s website or a mortgage comparison site for current rates.

Alternatively, you can take a look at this calculator on google to get a rough idea of how different term lengths on your mortgage can change your payment amount.

Or take a look at my post about how a quick mortgage check could save you £1000’s.

Please note that I am not a financial advisor and none of the above should be construed as financial advice.

 

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