Or on the irrationality of longer term mortgages.
The average mortgage term in the UK is now 30 years. 41% of mortgages now have terms of over 25 years compared to just 14% before the pandemic( LinkedIn article 2023) and 26% of home movers took out mortgages on 31–35 year terms in 2022. (The Guardian).
The trend towards longer term mortgages can be explained by increasing inflation pushing up living costs, but also increasing interest rates pushing up the cost of borrowing.
Borrowing over the longer term does reduce your monthly mortgage payments compared to a shorter term, enabling you to have more money every month to meet your needs and wants, but the increased cost of borrowing over 35 years compared to say 25 or 15 years is extreme.
To illustrate this let’s look at how much it would cost you over 15, 25 and 35 years to pay back an average first time buyer mortgage at today’s interest rates.
According to Money.co.uk the average first time buyer mortgage in the UK in December 2022 stood at £256, 220 in the South East. (The most expensive area is, of course, London, but I’m just ruling that out as being beyond the reach of most ordinary humans!)
According to Which the cheapest no-fee first time buyer mortgage rate with a 10% deposit was 5.5% fixed for five years with Nationwide, in September 2023.
The rates are ever so slightly cheaper for 15% deposits (or 85% mortgages) but to be as inclusive as possible for our southerners, I’ve modelled my repayments based on the 10% deposit, which would be £25K in the South East, still a hefty sum to save up!
Running these figures through a basic mortgage calculator yields the following results:
Or in more graphic terms
So comparing £256K over 15 years to the same amount over 35 years at 5.5% interest you are going to pay back an extra £201K on that original sum if you spread the payments over an extra 20 years.
Yes, you may well have an extra £700 a month to spend, or around £8K a year, but you lose MORE than that in the extra interest payments over those extra 20 years!
So the rational approach to my mind is the pay down the damned mortgage as quickly as possible
The only reason to NOT pay it down is if you have a strategy where that extra £700 a month is being leveraged to make you more than your mortgage interest rate a year, which would be fair enough.
But if you’re just easing up on mortgage repayments to give yourself a few hundred quid extra for doughnuts or whatever other frivolous jollies you may want, it’s a VERY expensive way to free up some money for immediate gratification.
Of course back in the day people could rely on ever increasing property prices to be their investment that offset the cost of longer term mortgages, then after that the interest rates were so low rapid repayment didn’t really matter.
However today I don’t think we can rely on either of those things: so maybe it’s time for less doughnuts and get that mortgage paid off in 15 rather than 35 years!
If, of course, you can afford it!