Homeowners risk 'never-ending mortgage'

With the average age of the first time buyer now at 29 years old, homeowners who continually extend the length of their term when remortgaging or taking out a new mortgage face a risk of reaching retirement age without having paid off the debt.

The research revealed third of homeowners increase their term when changing their mortgage. 73 per cent of homeowners who increase the term of their mortgage do so to reduce monthly repayments. However, calculations show in the long run this can be a costly error.

For example, someone who extends the term of their home loan twice in their lifetime can end up paying £28,835 in additional interest. Given the average homeowner remortgages/takes out a new mortgage every five years – if a person takes out a 25-year mortgage, then remortgages in five years to another 25-year term, they effectively create a 30-year total term. The five-year extension will cost an additional £14,460 in interest charges. If they remortgage again in another five years, they would pay further interest of £14,375.

Louise Cuming, head of mortgages at moneysupermarket.com, said: “The calculations show the phenomenal amount of interest which becomes payable when extending a mortgage just by five years, and how this exposes the tactic of reducing monthly repayments in this way as fundamentally flawed. It is clear that extending the mortgage term is a short-sighted solution which has a long-lasting impact. Not only do consumers end up paying significantly more, but they could still be paying their mortgage off at the same time as collecting their pension.

“The smart option when re-mortgaging is keep the total term the same, or better, reduce it and save a fortune.”

The moneysupermarket.com research also showed that of the third (29 per cent) of homeowners who extend the term on their mortgage, 72 per cent start their original term all over again. For example, they take out a 25-year mortgage and after several years remortgage or get a deal for another 25 years. In addition, 28 per cent increase the term opting for a longer period than the deal taken out originally.

Of the 17 per cent who actually decreased the term on their home loan, 67 per cent did so in order to pay off their debt more quickly.

Cuming added: “Our research highlights that 70 per cent of homeowners start off with a 25-year term, so it is imperative buyers do their homework before they enter any new contract. Most pensioners want to make the most of their retirement and certainly don’t want their golden years hampered by ongoing mortgage payments.”