While this approach may make monthly payments more manageable, it ultimately increases the overall cost of borrowing and raises important questions about financial planning later in life
Two in five new mortgages taken out over the past three years are now set to extend beyond retirement age. That’s according to analysis of data by LCP from the Bank of England.
Known as ultra-long or extended mortgages, they have grown in popularity during a time of higher interest rates, as borrowers aim to spread the cost over a longer term. While this approach may make monthly payments more manageable, it ultimately increases the overall cost of borrowing and raises important questions about financial planning later in life.
Jonathan Bone, Head of Mortgages at Better.co.uk, highlights the pros and cons of longer-term mortgages, from increased affordability and flexibility to the financial risks they may pose over time.
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Pros of a long-term mortgage
1. Lower monthly payments
“One of the biggest advantages of spreading a mortgage over a longer period is that the monthly repayments will be lower than if you opt for a shorter term. As buying a home has become increasingly more expensive, going for a longer term can make homeownership more accessible and affordable.”
2. Increased affordability
“As the extended repayment period reduces monthly costs, you may be able to borrow more, making it possible to afford a higher-priced property without straining your monthly budget. This is particularly beneficial for high-cost areas or first-time buyers.
“Lenders calculate affordability based on how much you can comfortably pay back each month. As a longer term lowers those payments, it becomes easier to meet the lending criteria.”
3. Flexibility to overpay
“Another significant advantage is that you will frequently have the option to overpay, which means paying more than the amount due each month or paying off a lump sum in one go. This helps to reduce the mortgage more quickly without increasing monthly repayments.
“Lenders allow overpayments up to a certain limit without penalties, enabling homeowners to pay off extra money when they have the financial means.”
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4. Beneficial alongside rising house prices
“In areas where house prices are significantly higher or property values are constantly increasing, a longer-term mortgage can make homeownership more affordable.
“As house prices rise, the cost of purchasing a home can become out of reach for many buyers, but securing a mortgage before prices increase further helps buyers lock in a property at a more manageable price. This reduces the risk of being priced out of the market as prices rise.
Cons of a long-term mortgage
1. Higher overall interest costs
“Although choosing a longer mortgage term can lower monthly payments initially, a major drawback is the higher overall interest costs. Over time, you will likely pay much more interest compared to a shorter-term mortgage, which can become a significant financial burden.
“In some cases, sacrificing more disposable income now in favour of paying less interest in the long run is an advisable alternative.”
2. Commitment into retirement
“Another downside of opting for a longer mortgage with a 35 or 40-year term is that you will likely still be paying it off well into retirement. This means you should either be prepared to continue working in order to afford the monthly payments or be able to demonstrate to lenders that you’ll have sufficient pension funds or other income options to continue paying once you’ve retired.”
3. Fewer remortgaging options
“A long-term mortgage can limit your options for remortgaging, as it often takes longer to build up sufficient equity in the property. In the early days, most of the monthly payments go towards paying off the interest rather than the principal price of the loan, so the loan balance remains high for a longer period.
“This slow reduction of the mortgage balance can make it harder to remortgage to a better deal or release equity, particularly if property values haven’t increased significantly. This may leave you stuck with your initial mortgage terms for longer, preventing you from taking advantage of lower interest rates or more favourable loan conditions in the future.”
4. Slower equity growth
“Since your monthly payments will be lower, your equity in the property will grow more slowly. Although you may be making regular payments, the amount of ownership you have in the property increases at a slower rate.
“As a result, it can take longer to reach a point where you have significant equity, which can become a problem if you want to move house relatively quickly, limiting your options when looking to sell, remortgage or access funds through the value of your property.”
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