Britons could save over £100 a month on their mortgage by changing one thing.
Britons often look at the interest rate, or the length of a fixed deal to see if they can save some cash on their mortgage, but an expert has explained another way people can save hundreds.
As interest rates remain high at 5.25 per cent, many homeowners are now opting for a longer mortgage term of over 30 years as this can cut their monthly repayments substantially.
Taking longer to repay one’s mortgage means they need to pay off less capital each month, so their payments are lower.
Ray Boulger, senior mortgage technical manager at John Charcol Mortgage Brokers said: “Twenty-five years ago, most new mortgages were for 25 years. This was the default option, and many people didn’t even consider a different term.
“With today’s much higher house prices many purchasers, particularly first-time buyers, are choosing longer mortgage terms of 30 years or 35 years, and sometimes even 40 years, as a way of making the purchase of their new home affordable, by reducing monthly payments.”
Taking longer to repay one’s mortgage means they need to pay off less capital each month, so their payments are lower
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Banks and providers have been seen hiking interest rates drastically to keep up with the rising base rate.
As a result, those coming off fixed deals are expecting their monthly payments to jump over £500.
The average mortgage interest rate in April 2022 was 1.64 per cent, now it is 5.74 per cent.
That means someone with a £250,000 25-year mortgage would see their repayments jump by over £500 a month.
One way to lower monthly bills is to extend one’s mortgage term.
If the homeowner with a £250,000 mortgage with a 5.74 per cent interest rate opts for a 30-year mortgage term their monthly repayment would fall by £114 cutting their annual bill by £1,368.
If they opt for a 40-year mortgage term, their mortgage repayments would fall even more sharply by £241 in the above example.
However, homeowners are warned extending the mortgage term does come with downfalls.
By opting for a 30-year mortgage term their monthly bills will drop by £114, but they will end up paying over £50,000 more interestthan if they had stuck with a 25-year mortgage term.
But Britons don’t have to stay on a 30-year mortgage term forever.
Boulger added: “Few people stay in the same home for 30 years and so in practice, most mortgages of 30+ years are repaid when the home is sold.
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“Furthermore, as most borrowers have a fixed rate for between two and five years, every time a fixed rate ends the term of the mortgage could be reduced if the homeowner is able to afford higher payments, perhaps because interest rates have fallen.”
He concluded that a longer mortgage term could help people afford their repayments while interest rates are high, but they could shorten the term again when rates fall to reduce the overall amount of interest that is paid on their mortgage.
