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Mortgage term extensions jump in popularity but should be ‘last resort or short-term plan’ – analysis

  • 16/12/2022
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Mortgage term extensions jump in popularity but should be ‘last resort or short-term plan’ – analysis
First-time buyers and home movers are increasingly extending their mortgage terms to 35 or 40 years in order to lower their payments, but brokers warn that it should only be considered as a “last resort or a short-term plan”.

Recent research from UK Finance showed that half of new first-time buyer mortgages and a over a quarter of home movers in the third quarter of this year have terms over 30 years.

The trade body said that this was up from a quarter of first-time buyers and less than one in 10 home movers ten years ago.

UK Finance said that the proportion of mortgage borrowers with longer terms has grown “almost continuously” since the global financial crisis and accelerated last year, which it said showed the impact of rising house prices and new mortgage rates on affordability.


Term extensions of up to 15 years becoming more common

Brokers across the board have said that extensions have become more common, and that they are one of the easiest ways for clients to reduce their monthly payments, with terms extensions varying from five years up to 15 years.

Alastair Hoyne, chief executive at Finanze, said that there were two reasons for this, one was to reduce monthly mortgage payments by spreading the cost over a longer period of time and the second could be to free up cash for other purposes such as home improvements, investments or saving for retirement.

Justin Moy, managing director at EHF Mortgages, said: “We have certainly seen plenty of first-time buyers and home movers extend to 35-year terms, just to make it affordable and one or two have been as long as 40 years.”

He noted that this was particularly the case for those buying in the South East and around London as house prices were higher than the national average and incomes were more stretched.

“Whenever we discuss budget and mortgage terms, we work to the principle that the term can be reduced in the future, as affordability allows in the future and that any term is not set in stone. When remortgaging or moving up the property ladder, that is often the time to shorten that term,” Moy said.

Gary Boakes, director at Verve Financial, agreed and said that it had a “large number of clients” looking to extend their mortgage term upon remortgaging to lower their monthly costs.

He continued: “With the majority of mortgage payments increasing 40 to 50 per cent, it is understandable given the cost of goods, food and heating why customers are looking to save every penny they can.

“I’m a firm believer that we have a long-term goal for our mortgage but in the short term, we match our mortgage to our circumstances as that will constantly change, so I’m happy to recommend people adding five to 10 years to their term if that makes them sleep at night.”

Samuel Mather-Holgate, independent financial adviser, said that extending a mortgage from 25 to 35 years could save £150 per month depending on interest rate.

Mike Staton, director at Staton Mortgages, said that extending the mortgage term was often the “easiest option” for clients and the “most popular”.

He said that many lenders allowed a maximum age of 75 so there are a lot of options out there.

According to Criteria Brain, 16 lenders do not have maximum age at the end of mortgage term, with other lenders ranging between a maximum age of 70 and 95 years.

The most popular maximum ages are 75 with 16 lenders, 85 with 15 lenders and 11 lenders at 80 years old.

Staton said that one client had extended their mortgage by five years and cut their monthly payments by around £300.

“However, you need to be aware that like all good things in life, this reduction comes with a huge risk. Having a mortgage in your 70s can be massively detrimental to your retirement plans so should only be considered as a last resort or a short-term plan.”


Extending term will increase amount paid overall

Amit Patel, adviser at Trinity Finance, said that there had been a number of borrowers who “had no option” but to extend the mortgage term to make monthly repayment more affordable.

“This is more costly as the interest accrues for the additional years the term has been extended to. Some have extended them by five to eight years. I advise my clients to make overpayments where possible to reduce the overall cost of the interest as most lenders allow overpayments up to 10 per cent without incurring an early repayment charge,” he explained.

Rita Kohli, managing director at The Mortgage Stop, said that by extending the mortgage term, the impact of higher mortgage rates but it did not mean monthly payments would not increase.

She said that one client was due to see an increase in their monthly mortgage payment by almost £600. They decided to extend their term by 10 years and reduced the impact of the increase by £400, but the overall cost of their mortgage is now “significantly higher”.

“Clients must understand this before making a decision. Some clients who want to extend will see their term go past retirement age which they haven’t considered before and may impact their retirement plans. It’s important to consider all factors when looking at extending,” Kohli warned.

Kylie-Ann Gatecliffe, director at KAG Financial, said that extending the term was a “short-term help to reduce the burden of monthly payments”.

She continued: “We do always highlight to clients the difference in interest this will make to their overall mortgage. Effectively by increasing the term their total interest paid back will always increase.

“This does deter some clients from doing this, whereas others need the safety net of a lower monthly payment. As rates continue to reduce, the increase in monthly payments is reducing which will hopefully prevent term extensions further.”

Chris Sykes, technical director at senior mortgage adviser at Private Finance, that he didn’t think all clients appreciated the scale of the decision as it could “very significantly increase the interest costs” that a borrower pays.

“Although many intend to reduce it back down or overpay, that intention doesn’t always materialise into action. It would be interesting to see if there is any data anywhere on the percentage of people that overpay,” he noted.

“I think the key is that it is a big decision to make and if higher payments can be paid, it is usually best they are [paid] and the term left as is.”

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