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Should I Extend My Mortgage Term?
April 12, 2024

As mortgage rates have increased, many people have explored different options to try and keep their monthly payments as low as possible.

Spreading the payments over a longer period could reduce the monthly outgoing, but there are other important considerations when asking should you extend your mortgage term?

What is the Mortgage Term?

The mortgage term is the total amount of years that you set the loan up for.

Historically, this was commonly 25 years, but in many cases this can be up to 40 years, depending on a person’s age and their planned retirement date.

A mortgage term should not be confused with the benefit period of a product (i.e. a 5 year fixed rate product on a 25 year mortgage has a benefit period of 5 years and a mortgage term of 25 years).

Does Extending a Mortgage Term Make It ‘Cheaper’?

Assuming you have a capital and interest mortgage, if you consider a 25 year term vs a 35 years term with everything else on the product being the same, then the 35 year term will have a lower monthly payment.

HOWEVER, by taking a longer term, you will pay more interest overall and depending on the loan amount and term, this can be a significant amount.

Does Extending the Mortgage Term ‘Save’ you Money?

Again, this is a similar situation.

In recent times, as rates have increased along with inflation and the cost of living, people have been looking at ways to cut costs and save money.

However, when it comes to extending a mortgage term, you have to be very careful with using the word ‘save’.

By reducing monthly outgoings on a mortgage in the short term by extending the term, it is highly likely that you will pay more interest over the long term and this can be a significant sum.

In short, extending a mortgage term does not make the loan ‘cheaper’ or ‘save you money’ when you consider the total you pay back. In this context, it could actually be much more expensive and cost you money.

Total to Pay / Overall Cost

When considering extending a mortgage term, a key point is what is known as ‘Total to Pay’ or ‘Overall Cost’

A simple way to do this, is that when you have decided on the right product, you get two mortgage illustrations for the same product with different terms and compare the two.

A full mortgage illustration (Fun Fact – formally called a European Standardised Information Sheet or ‘ESIS’ for short) will tell you the total amount you will pay over a mortgage term.

Now, this figure does assume that you will stay with the lender for the whole term, will move on to their standard variable rate at some point and that rate will never change.

In reality, this is highly unlikely, However, when it comes to comparing total to pay over different mortgage terms, this is actually very useful. This is because it compares a product on a like for like basis with the only difference being the mortgage term, so you can see the potential impact in terms of the total you pay.

So is it a bad idea to extend the mortgage term?

Not necessarily, it’s just important to consider all of the facts before deciding on the best course of action based on your circumstances, priorities and plans.

Of course, making sure mortgage payments are comfortably affordable, manageable and sustainable should be a priority. It’s just also important not to think of extending a mortgage term as a way to ‘save money’ or be a ‘cheaper option.’

Make sure you have all of the facts you need to make an informed decision around balancing your monthly outgoings in the short term with how much you pay back in interest over the long term.

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