UK mortgage rates: are longer-term deals cheaper? How to lower your interest rate - pitfalls explained

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With the cost of living crisis eroding first-time buyer deposits and high interest rates pricing them out of mortgages, a long term could get you on the housing ladder

Whether you’re a first-time buyer or an existing homeowner seeking out a new mortgage deal, the chances are that you’re seeing eye watering mortgage rates.

Interest rates have rocketed over the last three months as a result of the climbing Bank of England base rate, market concerns that UK inflation is not dissipating quickly enough, and chaos in the swap rates market. Even though the latest set of inflation data was more positive - with the headline rate dropping from 8.7% to 7.9% - fixed-rate deals have continued to climb.

The Bank of England expects a million households will see their monthly mortgage payments rise £500 by the end of 2026. Meanwhile, some form of house price reset is expected as higher interest rates price first-time buyers out of the housing market. These prospective buyers are already likely to have seen their deposits eroded by high inflation and the need to dip into savings to remain afloat during the cost of living crisis.

One method first-timers have been using to get around these affordability issues has been to take out a longer-term mortgage. According to recent figures from banking trade body UK Finance, 18% of first-time buyers took out a mortgage over a term of more than 35 years in 2022 - well above the 25 year term that had previously been standard.

Now, reporting by The Daily Telegraph has found the Treasury is considering a move to encourage lenders to offer longer-term deals. But is such a move a good idea - and what does a longer-term mortgage mean in practice? Here’s what you need to know.

Why do mortgage terms matter?

A mortgage term is the amount of time over which you are expected by your lender to pay back your mortgage.

The length of term you go for can either increase or decrease your monthly repayments. Typically, a shorter-term will involve you paying out more each month than if you went for a longer-term. But taking out a longer-term mortgage can see you pay more in the long-run due to interest.

Mortgages terms are the amount of time over which you agree you will repay your lender (image: Adobe)Mortgages terms are the amount of time over which you agree you will repay your lender (image: Adobe)
Mortgages terms are the amount of time over which you agree you will repay your lender (image: Adobe) | fizkes -

Lenders can allow you to alter the length of your mortgage during a term. However, they will usually do this on a case-by-case basis and may require you to have paid off a certain amount of your loan before agreeing to it.

A mortgage term almost always differs from a mortgage fix. Over the lifetime of a mortgage, you are likely to take out different types of fixed or variable rate products depending on how high interest rates are and the state of your personal finances. But in the case of the government’s reported plans, they are looking into encouraging property ownership by making it easier for first-time buyers to access mortgage terms that are held at a fixed-rate.

The idea is that this type of mortgage product, which is already popular in the USA and the Netherlands, will offer first-time buyers the chance to get on the housing ladder with cheaper monthly repayments. The deal would also shield them from any mortgage shocks, like the one we’re currently in the middle of.

What are the pitfalls of longer mortgage terms?

While reducing your monthly mortgage repayments is an attractive proposition - particularly at present given deals are currently at 15-year highs - there are some pitfalls to be aware of.

For starters, if you stick to a longer term, you will end up paying more to your lender over the course of your mortgage. Depending on the size of your loan, it could equate to a six-figure sum.

According to calculations by Which?, a buyer taking out a £180,000 mortgage over a 20-year term at a rate of 4% would pay £1,090 a month. Over the course of that term, they will fork out £81,783 in interest, meaning the total cost of the loan will come to £261,783.

First-time buyers are being hit by high inflation and soaring interest rates (image: Adobe)First-time buyers are being hit by high inflation and soaring interest rates (image: Adobe)
First-time buyers are being hit by high inflation and soaring interest rates (image: Adobe) | Adobe

But say the term was extended to 40 years, while the monthly repayments would drop to £752, the interest you would be paying over the course of the loan would amount to £181,098. In this scenario, the total cost would come to £361,098.

The other considerations are that you are likely to still be paying the mortgage off when you retire, as the average age for a first-time buyer is now 31-years-old. You will also build up equity in your home at a slower rate, which means you could be paying higher interest rates for longer (a lower loan-to-value ratio tends to bring lower interest rates with it) and may be more vulnerable to negative equity.

You can avoid these pitfalls by opting for an agreement that doesn’t penalise you for overpaying your mortgage - something that can reduce the overall term as you pay back your loan at a quicker rate. Another option is to try to accumulate more of a deposit so that you will not need to take out as much in the form of a loan - although this is clearly more easily said than done given inflation is still eroding savings at a rapid rate.

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