Flight for long-haul

Repaying a mortgage over a longer term has an immediate benefit, as homebuyers will experience reduced monthly payments. However, as a consequence, their overall mortgage repayments are much higher over the full lifetime of the loan.

For example, based on today’s average rates, the cost of repaying the average loan over a 30-year period is £23,297 higher than over 25 years, with 25 per cent more interest due overall. This is despite saving £83 a month in repayments during the initial fixed period.

So why are mortgage seekers turning towards longer terms? One possibility is the publicity that resulted from the implementation of the MMR – particularly some of the headlines around lenders’ stringent assessment of affordability – may have played a part in borrowers modifying their search requirements in order to better fit lender appetite.

In addition, for those purchasing a property – particularly first-time buyers who by nature are more constrained on affordability, therefore having less disposable income to spend on mortgage debt – it seems quite reasonable that they would want to increase the duration of their mortgage term to make initial monthly repayments cheaper. For this type of borrower, the benefit of reduced monthly repayments far outweighs the greater eventual cost.

For current homeowners, the opposite is true. Research shows that remortgage borrowers are looking to reduce the term of their mortgage, rather than increase it.

Many areas in the UK have experienced strong annual house price growth, and data suggests remortgage borrowers have increased their housing equity by almost £8,000 year-on-year. This places them in a strong position to access the best remortgage deals, and potentially seek to repay over a shorter term if they maintain or increase their current repayments.

Research shows that remortgage borrowers are looking to reduce the term of their mortgage, rather than increase it

For example, opting for a 15-year repayment term compared to a 25-year term can save borrowers £36,214 in total interest paid, and even choosing a 20-year term results in a saving of £18,635.

Unlike first-time buyers, existing homeowners will probably have had a mortgage for a number of years and are less constrained by affordability. For many, mortgage repayments relative to their current earnings will represent a relatively small percentage of their disposable income.

They are therefore in a position to drive down their mortgage debt faster by electing to repay their mortgage over a shorter term. Even though this approach will increase monthly costs, their repayments are likely to remain well within affordability.

For many borrowers who are remortgaging, the recent increase in property values will also improve their ability to service mortgage debt. Almost all lenders offer mortgage rates priced around loan-to-value bandings, with the most competitive rates available to those with the lowest LTVs. A small increase in property values of 5 per cent to 6 per cent – the current annual level of UK house price inflation based upon Office for National Statistics data – could open the opportunity for a borrower to be eligible for a 2 per cent rate rather than a 3 per cent rate.

Given that many borrowers will be remortgaging onto ultra-low rates that they have never experienced before, it is not unreasonable to consider that if those borrowers maintain their current monthly repayments, they will pay down their capital even faster – subject, of course, to early repayment charges and overpayment levels dictated by the product’s terms and conditions.

While there is plenty of noise around mortgage rates and LTVs, extending or shortening a mortgage term for affordability reasons is, perhaps, given less consideration. It is certainly not a move that will be suitable for everyone – for example, older borrowers will struggle to extend their mortgage term if it stretches past retirement age – but for some it may be an effective way of improving affordability.

Brian Murphy is head of mortgage lending at Mortgage Advice Bureau