Extending your mortgage term can be a useful way of tackling repayments if they are proving overwhelming.
Many homeowners are currently struggling with steeper mortgage costs following a series of increases in the Bank of England base rate. Although opting for a longer term could help alleviate some of the financial pressure you might be under each month, it’s worth remembering that it will mean you end up paying back more overall.
Conversely, reducing your mortgage term can be a great way of clearing your loan sooner and avoiding higher interest over time, but you’ll need to be confident you can manage higher monthly repayments.
In this article, we’ll explain how changing a mortgage term works and some of the things you need to consider before you proceed.
Speaking to an experienced mortgage advisor can help you to understand your options and get a great deal on your mortgage. If you’re looking for expert mortgage advice, you can speak to an independent mortgage broker with Unbiased. Every advisor you find through Unbiased will be FCA-regulated, qualified and unconnected to product providers – so they can offer you truly unbiased advice.
Why change your mortgage term?
You may decide you want to change the length of your mortgage term based on your financial situation. As mentioned, extending your mortgage term can make your monthly repayments more manageable, while reducing it can decrease the amount of interest you end up paying, even though your repayments will be higher.
If you want to work out how your repayments and interest would differ following a change to your mortgage term, you can use our mortgage repayment calculator.
Our mortgage repayment calculator can help you work out what your monthly repayments will be based on the interest rate, mortgage amount, and the length of your mortgage term. If you prefer to speak to someone – arrange to get expert mortgage advice from an experienced mortgage advisor.
Benefits of extending your mortgage term
If you are struggling to keep up with your monthly mortgage repayments, extending your mortgage term can reduce the amount you pay each month.
Say you have £40,000 left to pay on your mortgage with 20 years left on your term, at an interest rate of 5%. That’s roughly £264 to pay each month. However, if you extended your mortgage term to 25 years, your repayments would fall to £234 a month. By extending the term, you’re spreading out the time you need to pay it over, thereby reducing your payments.
While this might sound tempting, it does come with two major downsides.
The first is that extending your mortgage term will increase the amount you pay in interest across the whole term. Since you are paying off the mortgage capital more slowly, the amount that interest is charged on takes longer to diminish. This may not sound significant, but it can really stack up.
In the above example, for instance, even though you are paying £30 less each month, by the time your term is over you will have paid around £6,795 more in interest.
The second is simply that extending your mortgage term of course means that you will be stuck making payments to your lender for longer, so it’ll take longer to fully own your property.
Extending your mortgage term can be a useful option if you’re struggling to make your monthly repayments, but you should be conscious of the longer-term impact this will have on your finances.
The government recently announced a mortgage charter to help homeowners who have been hit by steeper mortgage payments. One of the measures they have introduced is the option for a customer (who is up to date on their mortgage repayments) to extend their mortgage term, and then to reduce it again within six months if they wish (either to the original term or somewhere inbetween). This would effectively mean temporarily reducing your mortgage payments, but then paying more after that, unless you decide to leave your term longer permanently.
Benefits of reducing your mortgage term
Reducing your mortgage term basically has the opposite effect of extending it – the advantages and disadvantages are effectively reversed.
So, on the one hand, you will have increased payments to make each month, since you will be paying off your loan over a shorter period.
On the other hand, by paying off your loan more quickly you will benefit from having to pay less interest overall. Not only this, but you will own your home outright in a shorter time.
Reducing your mortgage term is effectively a way of overpaying your mortgage. However, you can also do this by paying an upfront lump sum if you prefer. You can read more about whether overpayments could be a good idea in our article Should I overpay my mortgage?
How do I change my mortgage term?
You should contact your mortgage lender to apply to change your mortgage term. Don’t just start paying more or less each month, as this could either land you with overpayment penalties or put you in arrears respectively.
Your lender will let you know if you need to undergo an affordability check before they agree to extend or shorten your term.
If all goes well, it shouldn’t take long for the changes to take effect – for example, Nationwide says it will take just 10 days for a changed mortgage term to come into effect.
What should I think about before extending my mortgage term?
Changing your mortgage term either way is a big financial decision, and you should give it plenty of thought before committing.
Extending your mortgage can be particularly difficult if doing so causes it to overlap the age at which you plan to retire. This is because, most of the time, retirement leads to a reduction in income, which tends to worry lenders about your ability to keep repayments up.
If you are extending your mortgage but the term will still end before your retirement age, you may not have to go through any affordability checks, as you will be paying less per month on a (hopefully) consistent income. However, lenders may subject you to an affordability check or even flat-out refuse to extend your term if doing so would cause it to overlap with your retirement or past a certain age. Find out more in our guide What happens to my mortgage when I retire?
For example, Nationwide will only let you extend a mortgage until your 75th birthday or until you retire (whichever is sooner), and Halifax will require that you get mortgage advice if your proposed extension takes you past your 70th birthday or retirement.
However, even if your lender does not require it, it can be a good idea to seek mortgage advice before changing your mortgage term, in order to gauge its impact on your finances and see if there might be any other options available to you.
Speaking to an experienced mortgage advisor can help you to understand your options and get a great deal on your mortgage. If you’re looking for expert mortgage advice, you can speak to an independent mortgage broker with Unbiased. Every advisor you find through Unbiased will be FCA-regulated, qualified and unconnected to product providers – so they can offer you truly unbiased advice.
Alternatives to changing your mortgage term
If you are worried your lender will not let you change your mortgage term or are put off by the downsides we have discussed, there are other options you could consider.
For example, the new mortgage charter also gives homeowners the option to switch to an interest-only mortgage for a six-month period without affordability checks or it impacting on their credit score. This means you would only pay back interest on your loan for this time and not any of the capital itself, which potentially might be a better option for you if you’re going through a temporary financial setback. If you’re finding it difficult to cover your mortgage payments, our guide What can you do if you can’t pay your mortgage? may help.
Again, seeking advice from a mortgage advisor is usually the wisest thing to do before making any major decisions regarding your mortgage, as it will give you a sense of your options and which route is likely to best suit your financial situation.
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