More homeowners are extending their mortgage terms to reduce the pain of higher rates when their cheap deal ends. Some 24 per cent of remortgages, about 5,400, were taken on terms of 30 years or more in December, the trade association UK Finance said. This is up from 11 per cent, or 2,864 loans, in December 2021.
Millions of homeowners who had been on a mortgage rate of 2.5 per cent or below face paying much more since the Bank of England base rate rose from 0.1 per cent in 2021 to 5.25 per cent today. The average two-year fixed-rate deal is now 5.81 per cent, and the average five-year fix is 5.39 per cent, according to the financial data firm Moneyfacts.
About half of mortgaged homeowners’ deals have ended since the base rate started increasing in December 2021, according to the Bank of England. Santander customers are paying £220 more a month on average after remortgaging, its chief executive Mike Regnier told MPs last month.
If you had taken out a £200,000 25-year mortgage two years ago at a rate of 2.5 per cent your monthly payments would have been £897. After two years you would have reduced your loan balance to £188,187 but would still pay more because of rate rises — a rate of 5.81 per cent would mean repayments on the remaining 23-year term of £1,238.
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Extending your mortgage term is one way of softening the effect of higher rates. If you extended the loan’s term from 23 years to 30 the monthly repayments would be £1,106. If you extended it to 35 years they would be £1,049. Katy Eatenton, a mortgage broker at the advice firm Lifetime Wealth Management, said extending the term was “one of the main ways borrowers are managing higher rates”.
Elliott Benson,the founder of the Leeds-based broker Sett Mortgages, said: “Borrowers are doing this temporarily with a view to reducing the term again if rates fall when they remortgage again in two years’ time.”
Extending the term means that you will repay more over the length of your loan though. On the 23-year term, you would pay £342,601 in total, compared with £441,764 if you extended the term to 35 years. Despite the interest rate increase, the proportion of loans in arrears rose only slightly to 1.1 per cent at the end of last year, and the Bank of England said it expected it to stay well below the 4 per cent reached after the last financial crisis.
