FIRST-TIME buyers are being warned over “lifeline” mortgages that could actually end up costing them more.
By the end of 2023, around one in five first-time buyers were borrowing for a term of more than 35 years, according to UK finance.
The number of first-time buyers taking out 30-year mortgages has soaredAlamy
This is compared with fewer than one in ten the year before.
Longer mortgage terms can make monthly payments more manageable, but borrowers can end up paying more in interest.
Stretched mortgage terms could also affect some borrowers’ plans for retirement.
But more budding buyers are choosing longer mortgage terms as a way of coping with interest rate hikes.
Karen Noye, a mortgage expert at wealth management company Quilter, said: “For many people, to realise the dream of home ownership and achieve the loan amount required or to simply obtain an affordable mortgage they have had to increase the term of their mortgage, particularly as mortgage rates have risen in recent times.
“While this is not inherently wrong and can be a lifeline for people during this difficult time, it does come with implications and has the potential to stretch people’s finances later in life.”
Mortgage rates have been edging upwards amid tough market conditions.
Swap rates, which underpin fixed-rate mortgages, has been fluctuating in recent months.
HSBC, NatWest and Virgin Money have all increased the cost of new deals, spelling the end of widely available 4% five-year fixed deals.
The average five-year fixed residential mortgage rate today is 5.34%, according to financial information website Moneyfacts.
At the same time, the average fixed rate mortgage fee has increased, making the cost of buying a home even more expensive.
Moneyfacts found that the average product fee currently charged on a fixed-rate mortgage, excluding no-fee products, has increased by £46 since March 2023, to stand at £1,141.
Nicholas Mendes, from mortgage advisers John Charcol, said there is a correlation between rising costs and the length of the average mortgage term increasing.
But he added that choosing a longer term doesn’t need to set your back later in life.
How to get the best deal on your mortgage
If you’re looking for a traditional type of mortgage, getting the best rates depends entirely on what’s available at any given time.
There are several ways to land the best deal.
Usually the larger the deposit you have the lower the rate you can get.
If you’re remortgaging and your loan-to-value ratio (LTV) has changed, you’ll get access to better rates than before.
Your LTV will go down if your outstanding mortgage is lower and/or you home’s value is higher.
A change to your credit score or a better salary could also help you access better rates.
And if you’re nearing the end of a fixed deal soon it’s worth looking for new deals now.
You can lock in current deals sometimes up to six months before your current deal ends.
Leaving a fixed deal early will usually come with an early exit fee, so you want to avoid this extra cost.
But depending on the cost and how much you could save by switching versus sticking, it could be worth paying to leave the deal – but compare the costs first.
To find the best deal use a mortgage comparison tool to see what’s available.
You can also go to a mortgage broker who can compare a much larger range of deals for you.
Some will charge an extra fee but there are plenty who give advice for free and get paid only on commission from the lender.
You’ll also need to factor in fees for the mortgage, though some have no fees at all.
You can add the fee – sometimes more than £1,000 – to the cost of the mortgage, but be aware that means you’ll pay interest on it and so will cost more in the long term.
You can use a mortgage calculator to see how much you could borrow.
Remember you’ll have to pass the lender’s strict eligibility criteria too, which will include affordability checks and looking at your credit file.
You may also need to provide documents such as utility bills, proof of benefits, your last three month’s payslips, passports and bank statements.
He said: “First time buyers do have the benefit of time, with earnings expected to increase during the mortgage term it’s important to continually review to ensure your circumstances and make the right decision which could save thousands in the long term.
“It’s important to ensure to continually review.
“Circumstances can change whether this be work, family or health as you get older and by reducing what you owe will give you more freedom later in life.”
How can I lower my mortgage payments?
Make overpayments
Most lenders allow customers on fixed rates to make overpayments of up to 10% of the outstanding mortgage balance in a year.
This is without being hit with an early repayment charge.
Overpaying by even a small amount could reduce the mortgage term and interest.
So even when there’s a longer term, borrowers have the flexibility to repay the mortgage more quickly.
Megan said: “Certain types of mortgage products allow you to make overpayments which could help to make repayments past retirement age more manageable or mean you are able to repay your mortgage before you retire.
“Making overpayments even if a small amount, over a number of years may allow you to reduce the term in the future without it having such a big impact on the monthly payments.
“Overpaying can also help to reduce the amount of interest paid by decreasing the overall term length.”
Overpaying will also slash the interest bill over the longer run and could also cut the loan to value more quickly – opening up access to better deals.
Review your mortgage term
It is possible to review your mortgage term every time you take a new deal.
So even if you have taken the maximum term initially, it’s always worth taking another look.
Karen said: “It might be affordable to reduce the term in the future, even just a year or two can make a difference.”
Get mortgage advice
“Shopping around for the best rates will help not only initially but also each time a deal comes to an end,” said David Hollingworth, an associate director of L&C Mortgages.
“Taking advice on the best value deal for you could help to limit the need to lengthen the term as much as substantially but will also ensure that you keep it under review in the years to come.”
A mortgage broker who can compare a much larger range of deals for you.
Some will charge an extra fee but there are plenty who give advice for free and get paid only on commission from the lender.
Do you have a money problem that needs sorting? Get in touch by emailing [email protected].
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