In to consider overpaying whilst rates remain

In the past, 25-year mortgage terms were the norm, but new Government figures show that over half of first-time buyers are taking out mortgages of 30 years or more. Facing increased house prices and more stringent affordability checks, the number of first-time buyers taking longer term mortgages to reduce monthly repayment costs has increased by 40% according to the English Housing Survey.

 

The change has come about quite quickly. Today, 42% of first-time buyers have a mortgage term of 20-29 years – a drop of 6% since 2016, when over half chose a mortgage on the same terms.

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“The rise of longer mortgages is an unintended consequence of the FCA’s mortgage affordability rules, which ensure people could afford their monthly repayments if interest rates rise.  We are seeing a lot of movement towards 30-plus year mortgages” said Daniel Hegarty, CEO of online mortgage firm Habito. 

 

Lower monthly mortgage commitments will help many first-time buyers get on the ladder, but they would be wise to consider overpaying whilst rates remain low. Paying a little extra each month means having a lower outstanding balance if rates rise in the future, or making higher repayments will knock years off a mortgage term and save thousands in interest payments.

 

A first-time buyer taking a £300,000 mortgage over 30 years on an average rate of 4.09% could off their debt 4 years early and save £35,260 in interest payments, by overpaying their mortgage by £200 per month. If that is unrealistic, a minimal £25 overpayment can still reduce your mortgage term by 7 months and save you £5,737 in interest payments, according to the moneysavingexpert.com overpayment calculator.

 

Whilst longer term mortgages are becoming the norm, first-time buyers should be factoring in the overpayment facility and using it to their advantage, to save money and to be mortgage free earlier than expected.