A common mortgage mistake can cost homeowners up to £19,000 over the term of their loan – but an expert explains how to avoid spending more than necessary.
Those lucky enough to have enough cash to deposit in a bank should be aware of the hidden cost of choosing a longer mortgage term.
A mortgage term is the amount of time it takes to pay off your loan – you can choose to have a shorter or longer term.
Short periods are usually considered to be 20 years or less, while 30 years are classified as longer periods.
The most common mortgage term is a 25-year mortgage, but you can choose one that lasts as long as 40 years.
As home prices continue to rise, choosing a longer mortgage term is one way buyers can lower their monthly payments — but it comes at a cost.
Nick Morey, technical director at Koreko, warns that opting for a longer term could mean you’re paying too much in interest payments.
He has decades of experience dismantling mortgage tips, and is one of the experts on The Sons Squeeze Team panel.
If you’re worried about how to meet your needs, are struggling to pay off your loans or don’t know how to best manage your cash, get in touch by email Squeezeteam@thesun.co.uk,
Andrew’s money saving tips will come in handy as could rising interest rates Add £612 to your mortgage repayment.
Anyone with a variable or tracker mortgage will feel the pinch the fastest, as these deals are tied to the bank’s base rate – when it rises, its monthly repayment,
Here’s how taking out a longer term mortgage can add up to £19,000 to your repayment.
High interest payment – £19,000 . until
taking out one long term mortgage Can be tempting in the beginning.
Your repayment is spread over a longer period – which means the amount you pay each month will be less.
This can be tempting – especially with households paying more each month for other bills such as energy, food and fuel.
but if you can get high repayment rateIt makes sense to choose a shorter mortgage term.
The shorter your mortgage term, the less time you have to accrue interest, which will add up to the total amount you paid over the term of your loan.
For example, on a £250,000 mortgage at an interest rate of 2.5% with a 25-year term, your monthly payment would be £1,122.
The total amount you will pay in interest over the first 25 years before clearing your mortgage is £86,506.
If you opted for the 30-year term instead, your monthly payment would drop to a more manageable £988. But you will pay a total of £105,662 in interest.
“The 30-year tenure is £19,146 more expensive, as it carries an additional five years of interest,” said More.
“So while longer mortgage terms are very helpful in reducing monthly costs, the total cost can be quite high when you pay interest over a longer period of time.
“If you can afford to shorten the period in any way, which could be through higher payments or regular or ad-hoc payments, that’s usually a good idea.”
How else can a long-term mortgage affect me?
Carrying out a longer mortgage term can also affect when you are able to retire.
If you’ve been paying off your mortgage for a long time, you’ll most likely need to keep working to provide the funds to meet the repayment.
“When people choose a term that means they are still paying beyond age 70, it can mean that retirement may not happen earlier than the age when it probably should be,” Mr. More said.
“You might have plans to clear balances before then, but if those plans don’t materialize, you might be faced with working longer hours than you should.”
One option that buyers could take is to get a longer mortgage term initially, and then reduce it when they re-mortgage and potentially receive higher salaries and could face larger repayment.
It’s important to review your mortgage deal regularly anyway, as better rates may be available, which can cut your costs as well.
Recently a new scheme has been launched which can help first time buyer climbs the ladder – We tell you what it is.
While another mortgage expert explains Tips for getting your application approved Because it becomes difficult to deal.
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