Should I take a cheaper longer mortgage?

We are seeing increasing numbers of buyers taking mortgage terms of 35 and 40 years. The old mortgage standard was to take your mortgage over 25 years, but with house prices increasing, people living and working for longer the trend is upwards.

Is it right for you? Would you take a cheaper mortgage if you had to pay it for longer?

Why is it happening?

House prices have increased and although the pace has slowed due to Brexit uncertainty, over the long term the trend is up. We are all living for longer and retirement ages are increasing every decade. People are tending to stay at home with parent for longer and buying their first property in their thirties. As a result lenders are offering products with longer terms and customers are choosing them.

Who is it good for?

You could consider a longer mortgage term if you expect your income to increase or you are buying a property that needs lots of work. The cheaper monthly payment has short term benefits but over the long term it is more expensive.

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What is the cost?

Each year you are paying a mortgage, you are paying interest and some of the loan off.

It you took a £100,000 capital and interest repayment mortgage out over 25 years at an interest rate of 3% your monthly payment would be £474 and you would pay £42,200 in interest and £142,200 in total.

If you took the same loan over 40 years your monthly payment would be £358 and you would pay £71,840 in interest and £171,840 in total or around 70% more interest.

The other interesting figure is the amount that you pay off in the first 5 years.

Over a 25 year term you would pay off £14,495 while over a 40 year term you would pay off £6,981 which is less than half.

Other Options

If your monthly budget is restricted, but you expect your income to increase or your income fluctuates due to commission or overtime, you could consider over paying on your mortgage during the weeks or months that your pay is greater that normal. This is known as an over-payment. If your mortgage lender allows this it could save you interest and pay your mortgage off early. If you took the 40 year mortgage detailed above and overpaid by £50 per month you could pay your mortgage off 8 years early. This will save you £34,368 in monthly payments.


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