Should I extend my mortgage to a longer term to lower the monthly payments?

Hard-up homeowners and buyers are taking out longer mortgages in an attempt to bring down soaring rates, new data reveals. 

The number of people taking out mortgages with terms of 35 years or more hit a high of 88,059 in 2022 compared to just 40,471 in 2018 – a 117 per cent increase.

Financial firm Quilter examined mortgage data from the Financial Conduct Authority regulator which shows just how borrowers are trying to reduce their monthly costs.

Homeowners have been hit by rising mortgage rates, with some now above 7 per cent. 

Mortgage extension: Taking out a longer-term mortgage is one way to reduce your monthly costs, although you will pay more interest overall

While increasing the term of a home loan brings down monthly mortgage payments  it also means the amount repaid in total rises. 

Allowing homeowners to extend the term of their mortgage without harming their credit score was one of the pillars of the Government’s recent mortgage charter, which went live earlier this month.

The package, agreed in conjunction with many of the UK’s biggest mortgage lenders, also protects homeowners from repossessions for 12 months from their first arrears and provides the option to switch to an interest-only loan for six months without penalty.

Mortgage prices are rising due to successive Bank of England interest rate increases since December 2021, which are factored in to the price of new homeloans.

That, combined with historically high house prices, is forcing people to take out longer terms to lower their monthly payments.

There are now also nearly four times as many people taking out mortgages with terms that they will be still paying off in their 70s.

In 2022, there were over 12,000 people over the age of 41 who took out a 30–35-year term. 

By comparison, in 2018 just 3,035 people over the age of 41 took out a mortgage of this length.

The Bank of England base rate now sits at 5 per cent, and the average fixed rate two-year 95 per cent LTV deal is around 6.5 per cent, making it likely that even more people, regardless of age, will be forced into taking out longer mortgage terms.

Karen Noye, mortgage expert at Quilter, said: ‘For anyone considering entering into a mortgage that will see them well into retirement, it is vital they think ahead and are aware of the potential risks. 

‘Many people under save for their retirement anyway without even taking into account the fact they will not be earning and need to pay for a mortgage as well as living costs.

‘Similarly, while a mortgage term of 35 years or more can result in lower monthly repayments, you are likely to pay considerably more in interest over the course of your mortgage term.

‘If possible, it is always worth getting mortgage advice where possible to make sure that you doing the best thing for your finances as the cheapest deal is not always the most valuable particularly over the long term.’

We look at how easy it is to change your mortgage term and what the implications are.

What does it mean to extend your mortgage term?

A mortgage term is the length of time you have to pay back a loan. Reducing the term means the loan is paid back over a shorter period of time, increasing the monthly payments. 

Extending the term of your mortgage will reduce monthly costs as the loan is repaid over a longer period of time.

Mortgage lengths are usually for 20 to 30 years, with borrowers often taking on rates for two or five years at a time.

It is also important to remember that extending the mortgage term will increase the total amount of interest you would have paid over the course of the loan, adding to your overall cost, even if it means payments are more affordable in the short term. 

If a £350,000 mortgage over 25 years moves onto a 6 per cent interest rate it means payments of £2,256 per month.

By increasing the loan term to 30 years the payments reduce to £2,099 per month – a difference of around £157 a month.

However, with a 25 year term the total interest paid on the loan is £326,516.47, extending the term to 30 years increases this to £405,433.66. 

The extra five years of interest payments results in almost £80,000 being added to the overall loan cost. 

This means any decision to extend should be taken very carefully, as it can be extremely costly in the long-run.  

> Use our True Cost Mortgage Calculator to find out how changing your loan term could impact your payments 

Can you extend the term of your mortgage without needing a new loan?

There are no standard requirements for what you need to do if you want to change your loan term, as this varies between lenders.

Most will ask you to complete a new application when changing the fundamentals of a mortgage.

The lender will want to be sure you can still afford the payments after the change, so it may be a longer process to shorten the term, as your payments will increase.

Any changes from the original mortgage term will need to undergo a new mortgage application, which means a reassessment of your income, circumstances, credit report and the lender’s criteria at the point of application. 

In practice, if none of your circumstances have changed then this shouldn’t be an issue.

On the rise: Increasing interest rates continue to hammer homeowners, who are having to take on much higher mortgage payments

But if your income has reduced, or a lender’s criteria has changed, you could find your existing lender wouldn’t be able to offer you the same terms as previously.

In this case it might be cheaper to remortgage with a new lender.

Nicholas Mendes, mortgage technical manager at mortgage broker John Charcol, said: ‘The majority of lenders will allow you to extend the term and keep the existing product you’re in, such as a fixed rate, though there will be some exceptions.’

This is the same if you want to reverse the change further down the line, so it is worth making sure the move is one for the long term to avoid further complications.

Does extending your mortgage term mean any penalties from lenders?

Changing your mortgage term is unlikely to directly result in you having to pay any penalties. 

However, if the change means changes to the product, such as a rate change, you will need to speak with the lender to understand if you would be liable to pay any early repayment charges as a result.

Will changing your mortgage term impact your credit score?

No, changing your mortgage term itself shouldn’t impact your score. However, if your lender requires a new hard credit search then this will show on your credit report.

That can make it harder to get decent terms on mortgages and loans. 

It is always worth asking lenders before making any changes, and you may not be able to use a broker for the process.

What has the mortgage charter changed?

Lenders are likely to be helpful when working with borrowers to extend their mortgage under the terms of the charter.

Borrowers also have more options to change their mortgage term.

However, Mendes adds that the charter has changed little in terms of concrete rights of borrowers.

He added: ‘Anyone can already talk to their bank or their mortgage lender, and just talking will have no impact on their credit score. However, many borrowers don’t realise this and so reinforcing the message is helpful, but otherwise it doesn’t change anything.’