In recent days, the news headlines have been full of stories about 'ultra long mortgages' and the worrying increase of young people taking out mortgages over terms of 30, 35 or even 40 years. Data obtained by Steve Webb, the former Liberal Democrat pensions minister, shows that over the last three years, more than a million mortgages have been arranged to have a term which goes beyond the borrower's state pension age (https://www.theguardian.com/money/article/2024/may/13/rise-in-ultra-long-mortgages-poses-risk-to-uk-retirement-prospects) Younger buyers desperate to get onto the property ladder are gambling with their retirement prospects and this, combined with a lack of savings for retirement, could result in many people being at risk of poverty in their old age.
The rise in interest rates and house prices in the UK in recent years is thought to have fuelled the increase in the number of ultra long mortgages. While extending the term of your mortgage can cut repayments, it also results in paying more over the life of the mortgage. For example, if someone borrows £250,000 over 25 years, they will pay £1461 a month if the interest rate is 5%. If they extended the term to 35 years, the monthly repayment will go down to £1262, saving £199 a month.
In the current financial climate, that kind of saving could be the difference between purchasing a home or not. However, there is a catch. As you are repaying the mortgage for an extra 10 years, the capital and interest repayment will jump from £438,443 to £529,922, costing an extra £91,479. The stretch of an extra 10 years on your mortgage will cost you over £9000 a year.
However, if you do find yourself in the position of having to take on a longer term mortgage to get on the property ladder, all is not lost. In this article, we will explore four ways that can help you to pay off your mortgage faster and hopefully leave you mortgage free by your retirement.
Make Overpayments
If you can, increasing the amount of your monthly mortgage payment, even by just a small amount, will result in shortening the term of your mortgage and decreasing the amount of interest you have to pay. Most banks, building societies and mortgage providers will allow borrowers to overpay up to 10% of the outstanding mortgage amount every year, without incurring any penalties. Contact your lender to see whether you are allowed to overpay and what the terms are.
Using the same figures as above, if you have a mortgage of £250,000 taken over 35 years and make an additional payment of £100 a month, you could save £55,770 in interest over the term of your mortgage and knock 5 years and 11 months off the term. As your financial situation changes over the years, you may be able to make a larger monthly payment, or if times are tough, you can go back to paying the original payment. But paying extra when you can will always be a good decision for the long term future of your mortgage.
Use Any Unexpected Income
If you have a job where you get a bonus or if you have income from shares or receive an inheritance, these lump sum funds can also be used to help pay off your mortgage. As with making monthly overpayments, a lump sum repayment will reduce the total amount of interest and decrease the term of your mortgage. You will need to be aware of the 10% overpayment limit, though, otherwise you may incur a penalty.
Consider An Offset Mortgage
If you have any savings, you can use them to help reduce your mortgage debt with an offset mortgage. Offset mortgages work by taking your savings balance and subtracting it from your mortgage debt and then only charging interest on the remaining debt amount. As with our previous financial example, if you have a mortgage of £250,000 and savings of £20,000, with an offset mortgage, you would only be charged interest on the £230,000. The result of an offset mortgage is that you will pay less interest overall and you can clear your mortgage debt faster.
The only caveat to this option is that your savings will need to be linked to your mortgage through the same bank or building society, and you will not earn additional interest on your savings. But if you compare the amount you will save in the interest on the mortgage debt, it should make financial sense as you will also not be paying any tax on the interest you would have earned. Furthermore, if your financial situation changes and you need the money from your savings, you will always have access to it.
Change to a Better Interest Rate
This option may not seem possible at the present time, but in the future, there may be a chance to change to a better mortgage deal with a more competitive interest rate. When your current deal comes to an end, always shop around to find the best interest rate so your monthly payments will be as low as possible. This will then give you more opportunities to overpay and reduce your mortgage term. Use a mortgage calculator to find out what is possible https://www.cmmemortgages.com/mortgage-calculators/how-much-can-you-borrow/.
Always remember to check the set up fees on the deals with the lowest rates, as they are usually the most expensive. If you add this fee to your mortgage, you will also be paying interest on this amount, which will cost you more in the long term.
Is it Always a Good Idea to Try and Clear Your Mortgage Early?
On the whole, the answer to this is yes. However, you also need to assess your personal financial situation. If you have a lot of 'expensive' debts, such as credit cards or unsecured loans, clear these first before overpaying your mortgage because the interest costs overall will be so much higher than your mortgage borrowing.
Your home may be repossessed if you do not keep up repayments on your mortgage.
If you're looking to learn more about mortgages, visit https://www.onedome.com/mortgages/mortgages-explained/ for detailed information and resources. OneDome and CMME Mortgages are part of the same group, with OneDome acting as a referrer to CMME who are authorised and regulated by the Financial Conduct Authority to provide mortgage advice and products.
Why not join the nethouseprices community by registering for our nethouseprices newsletter for information on the property market, mortgage news and house prices in the UK?
Make a comment