Longer mortgage terms are becoming more popular as they enable borrowers to boost their affordability.
According to Bowmore Financial Planning, sales of mortgages with terms of over 30 years increased 13 per cent in past year.
The financial firm said there were 521,000 sales of longer-term mortgages in the year to September 2023 compared to 459,296 in the previous 12 months.
Borrowers often take longer mortgages to reduce monthly payments, which has been especially useful in the context of higher mortgage rates.
The increase in interest rates has led more homeowners to look at these much longer-term mortgages as a way of keeping their monthly mortgage payments affordable.
But Bowman warned that, despite benefitting from lower monthly repayments, borrowers risk paying far more interest over the long term and therefore a larger total amount.
Borrowers taking out a 25-year mortgage to buy the UK’s average property worth £288,000 at the current average interest rate will pay £1,675.18 per month, for example. By taking out a 40-year mortgage with the same deposit amount the same borrower would pay £1,430.56 per month.
However, whilst their monthly payments are lower, longer-term borrowers will pay 29 per cent more during the term of their mortgage. 40-year mortgage holders pay a total of £572,000 compared to £442,000 for 25-year mortgage holders.
Charles Incledon, director at Bowmore Asset Management, says: “The worry is that some borrowers haven’t fully understood the potential impact 30-40-year mortgages could have on their long-term finances. They will be quite an additional amount in interest.”
“When interest rates are low, monthly mortgage payments are easier to manage for borrowers. With interest rates at their current level, 30–40-year deals maybe tempting to those struggling with the cost of living.”
“Not only will borrowers be paying much more in the long term, but they are also taking funds away from their retirements. Missing out on that money for so many years can make a measurable difference to the size of a retirement pot.”