Is the mortgage market turbulence getting you down? Have you got a mortgage-related question you need answering? Email in, and we will get one of our experts to reply. Nick Mendes, mortgage technical manager at John Charcol, has given his advice to a reader below. If you have a question for our experts, email us at money@theipaper.com.
Question: I had a 2 per cent mortgage rate, which is expiring later this year. My rate will probably go up to around 5 per cent. Currently, I’m on a 25-year mortgage term, which I’ve completed five years of. Should I push it up to 30 years? Would that save me cash?
Answer: Extending your mortgage term can be a sensible way to ease the immediate pressure on your monthly budget. But it is not a decision to make without weighing the longer-term cost.
You fixed at a point when mortgage rates were far lower than they are today, so the increase you are facing may be significant. You will not be alone in that. Many borrowers coming off deals taken out in 2021 are finding that their new payment looks very different.
Extending the term is usually possible when you remortgage, provided you meet the lender’s affordability checks and their rules on the maximum age at the end of the mortgage.
Having taken out a 25-year mortgage in 2021, you will have around 20 years remaining. Resetting that to 30 years spreads the balance over another decade, which reduces what you pay each month.
On a balance of £200,000, the difference between repaying over 20 years and 30 years could be a few hundred pounds a month, depending on the rate you secure. That can make a noticeable difference if your budget is already being stretched by higher household costs.
The trade-off is that you will pay more interest overall. You are borrowing the same money for longer, so the lower monthly payment comes at a price. Over an extra decade, that could add tens of thousands of pounds to the total interest paid.
That does not automatically make it the wrong move. A mortgage payment has to be sustainable. A payment that leaves some room in the monthly budget is better than one that leaves you with no flexibility if costs rise or circumstances change.
Be clear on whether extending the term solves a genuine affordability problem or simply gives you the lowest possible monthly figure.
Stretching the term further than you need to adds cost, so it is worth looking at a few options. Moving from 20 years to 25, 27 or 28 years may give you enough breathing space without taking on the full cost of a 30-year term.
You should also check how the new term fits with your longer-term plans. Many lenders will now lend beyond the traditional retirement age, but if the mortgage runs into retirement, they may want evidence of how the payments will be covered once employment income stops.
Extending now does not mean you have to keep the mortgage for the full 30 years. Many products allow overpayments each year without an early repayment charge, although the allowance varies by lender and product. You may also be able to shorten the term again when you next remortgage.
A mortgage broker can compare the payment and total interest cost across different terms, as well as checking which lenders’ affordability and age criteria work for your circumstances. The aim is not simply to get the payment as low as possible. It is to make it affordable now without unnecessarily increasing the cost over the years ahead.