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Easy money mistake that could cost homeowners £450,000 extra – how to avoid it
We explain how to cut the cost of your mortgage
HOMEOWNERS considering making a common move to save money could actually end up forking out hundreds of thousands of pounds more long-term.
Longer mortgage terms can make monthly payments more manageable, but borrowers typically end up paying far more over time.
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Almost a quarter of mortgages taken on in December last year were taken on terms of 30 years or more, according to UK Finance.
And this week the Bank of England revealed over a million "ultra-long" mortgages issued over the last three years will drag on past state pension age.
Having a longer mortgage term gives buyers the means to borrow more and buy a pricier home, as their monthly payments will be lower.
But while these marathon deals can help with costs in the short term, they carry a major pitfall that many homeowners may not be aware of.
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Borrowing over a longer term could leave you paying considerably more for the debt compared to someone who took out a shorter deal.
This is because the longer the term, the longer you will be paying interest on your repayments - and this can quickly rack up.
In fact, doubling your mortgage term to save on your monthly bills could cost you hundreds of thousands of pounds extra in interest, according to data provided exclusively to The Sun by finance website Moneyfacts.
Someone borrowing £285,000 over 20 years at a rate of 5.81% would pay £2,010.71 a month on their mortgage, while borrowing the same amount over 40 years at 5.81% would cost them £1,530.53 a month.
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This £480.18 monthly saving may look like attractive for anyone trying to balance their mortgage with other household bills.
But this short-term gain comes at a significant cost long-term.
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If you borrowed £285,000 over 20 years at 5.81%, you would end up paying back £482,570 by the end of the term, meaning you'd pay £197,570.40 in interest.
But if you borrowed the same amount over 40 years at 5.81%, you'd end up paying back a whopping £734,654 in total, of which £449,654.40 would be added interest.
That’s £252,084 more you'd end up forking out in interest just by stretching the same loan over an extra 20 years.
These figures are based on all loan-to-value (LTV) ratios.
Your LTV is simply the percentage of your property that is mortgaged versus the amount you own in "cash".
So, if you put down a 20% deposit and borrow 80%, your LTV is 80%.
How to cut mortgage costs
MORTGAGE broker Nicholas Mendes, from mortgage advisors John Charcoal, has shared his top tips to help you cut down your mortgage.
Make extra payments - Paying more than the required amount on your mortgage can significantly decrease the total interest paid and shorten the loan period. Even small additional payments can make a big difference over time.
Refinance your mortgage - If you’re coming to the end of your fixed rate consider refinancing. Rather than opting to stay with your existing lender moving to a new lender can allow you to take advantage of lower interest rates, reducing your monthly payments and the total amount paid in interest. However, it's important to consider the fees involved in refinancing to ensure it's worthwhile.
Round up payments - Rounding up your payments to the nearest £100 is an easy way to pay extra on your mortgage without feeling a significant financial impact. You can do this be either contacting the lender to increase your direct debit or create a standing order.
Use surplus cash wisely - If you receive bonus, commission or overtime consider putting this towards overpaying on your mortgage.
Reduce the loan term - If you can afford higher monthly payments, consider refinancing to a shorter-term mortgage. This usually has higher monthly payments but significantly lower total interest costs.
Cut costs elsewhere - Review your budget to see if there are expenses you can reduce to allocate more money towards your mortgage. It may also be worthwhile to reduce any other debts and once cleared use any surplus towards overpaying.
Is a lengthy mortgage term right for me?
Taking out a longer-term mortgage could be the difference between being able to buy a home and being unable to afford it.
Younger borrowers under 30 could particularly find the stretch a useful way of getting on the ladder.
These buyers will, in theory, have plenty of time to reduce their mortgage term if their earnings increase or they build up more equity in their property - but many might not realise they should.
Nicholas Mendes, mortgage technical manager at broker John Charcol, explained: "First-time buyers do have the benefit of time, with earnings expected to increase during the mortgage term.
"It’s important to continually review your circumstances and make the right decision, which could save thousands in the long term."
But anyone looking to take out a new mortgage should first have an idea of their budget and how much they can afford to repay each month.
Mr Mendes said: “You should go for the shortest possible term, even if it’s just going for 34 years instead of 35.”
A mortgage term isn't fixed for the duration of the loan and can be changed each time you remortgage.
Remortgaging is where one fixed-rate deal ends and you swap onto another.
For example, if you take out the mortgage on a 35 year basis, there's nothing to stop you moving to a 25-year term if you can afford it when taking out a new deal.
Having a longer mortgage term could cause problems later on.
It comes after figures revealed that young home buyers are being forced to gamble with their retirement prospects by taking on ultra-long mortgages.
Over the last three years, over one million new mortgages have been issued with end dates beyond state pension age.
Mr Mendes said: "Money used for mortgage payments could be invested elsewhere for potentially higher returns.
"By committing to a long mortgage term, you may miss out on other investment opportunities that could contribute to later in life pension provisions."
Another potential downfall of a marathon mortgage is that it will take you longer to build up equity in your property because more of you repayments will be swallowed by interest.
Mr Mendes explained: "With a longer mortgage term, the rate at which you build equity in your home is slower.
"This means it takes longer for you to own a significant portion of your property, making it more challenging to build wealth through home equity."
Having more equity in your home could help you to buy a more expensive home in future, as any money you have in your house is money you have to spend on another property.
Building the amount of equity in your home could help you to buy a more expensive home in the future.
It can also mean you are less likely to have negative equity.
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This is when you owe more money on your mortgage than the value of the property.
This can leave you out of pocket, and in in turn, can make it difficult to sell or remortgage.
How do you find the best mortgage deals?
WE explain how to ensure you get the best deal on your mortgage or remortgage:
Websites such as MoneySuperMarket and Moneyfacts have mortgage sections so you can compare costs. All the banks and building societies will have their offers available on their sites too.
If you're getting confused by all the deals on the market, it might be worth you speaking to a mortgage broker, which will help find the best mortgage for you.
A broker will typically cost between £300 and £400 but could help you save thousands over the course of your mortgage.
You'll also have to decide if you want a fixed-deal where the interest you're charged is the same for the length of the deal or a variable mortgage, where the amount you pay can change depending on the Bank of England Base Rate.
Remember, that you'll have to pass the lender's strict eligibility criteria too, which will include affordability checks, and looking at your credit file.
You may also need to provide documents such as utility bills, proof of benefits, your last three month's payslips, passports and bank statement.
Do you have a money problem that needs sorting? Get in touch by emailing [email protected].
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