Warning for first-time buyers on the ‘lifeline’ mortgage that could cost you MORE
FIRST TIME buyers are being warned about ‘lifeline’ mortgages that could end up costing them even more.
According to British Finance, around one in five first-time buyers borrowed for a term of more than 35 years at the end of 2023.
This is compared to less than one in ten the year before.
Longer mortgage terms can make monthly payments more manageable, but borrowers may end up paying more in interest.
Longer mortgage terms may also impact some borrowers’ retirement plans.
But more and more first-time buyers are opting for longer mortgage terms as a way to deal with interest rate increases.
Karen Noye, a mortgage expert at asset management company Quilter, said: “For many people, the dream of owning their own home and reaching the required loan amount, or simply getting an affordable mortgage, has required them to extend the term of their mortgage …especially because mortgage interest rates have risen recently.
“While this is not inherently wrong and could be a lifeline for people at this difficult time, it does have implications and has the potential to put pressure on people’s finances later in life.”
Mortgage interest rates have risen slightly under difficult market conditions.
Swap rates, which underlie fixed-rate mortgages, have fluctuated in recent months.
HSBC, NatWest and Virgin Money have all increased the cost of new deals, meaning the end of widely available five-year fixed 4% deals.
According to financial information website Moneyfacts, the average five-year fixed mortgage rate is currently 5.34%.
At the same time, average fixed-rate mortgage costs have risen, making the cost of buying a home even more expensive.
Moneyfacts found that the average product fee currently charged on a fixed rate mortgage, excluding no-fee products, has increased by £46 since March 2023 to £1,141.
Nicholas Mendes, of mortgage adviser John Charcol, said there is a link between rising costs and the increase in the average mortgage term.
But he added that choosing a longer term doesn’t have to hinder you later in life.
How to get the best deal on your mortgage
If you’re looking for a traditional mortgage type, getting the best rates depends entirely on what’s available at any given time.
There are several ways to get the best deal.
Typically, the larger the down payment, the lower the interest rate you can get.
If you take out a new mortgage and your Loan-to-Value ratio (LTV) has changed, you will have access to better rates than before.
Your LTV decreases if your outstanding mortgage is lower and/or the value of your home is higher.
A change in your credit score or a better salary can also help you access better rates.
And if you’re nearing the end of a standing deal soon, it’s worth looking for new deals now.
You can sometimes lock in current deals up to six months before your current deal expires.
If you leave a fixed deal early, you’ll typically be charged an exit fee, so you’ll want to avoid these additional fees.
But depending on the cost and how much you can save by switching or staying, it may be worth leaving the deal, but compare the costs first.
Use one to find the best deal Mortgage comparison tool to see what’s available.
You can also contact a mortgage broker who can compare a much wider range of offers for you.
Some charge an additional fee, but there are plenty who provide free advice and are paid only on the lender’s commission.
You will also need to consider mortgage costs, although some may not have any costs at all.
You can add the costs (sometimes more than € 1,000) to the costs of the mortgage, but keep in mind that you will pay interest on it and will therefore cost more in the long term.
You can use a mortgage calculator to see how much you can borrow.
Please note that you will also need to meet the lender’s strict criteria, including affordability checks and viewing your credit file.
You may also need to provide documents such as utility bills, proof of benefits, your last three months’ pay slips, passports and bank statements.
He said: “Starters have the advantage of time. With income expected to increase over the life of the mortgage, it is important to continually assess your circumstances and make the right decision, which can save thousands in the long run.
‘It is important to ensure that there is continuous evaluation.
“Circumstances can change, whether work, family or health, as you get older. Reducing what you owe will give you more freedom later in life.”
How can I reduce my mortgage costs?
Paying too much
Most lenders allow fixed-rate customers to overpay up to 10% of the outstanding mortgage balance within a year.
This without having to deal with early repayment costs.
Paying even a small amount too much can shorten the term and interest rate of the mortgage.
So even if there is a longer term, borrowers have the flexibility to pay off the mortgage faster.
Megan said: “Certain types of mortgage products allow you to overpay, which can help make repayments after retirement age more manageable or allow you to repay your mortgage before you retire.
“If you pay too much over a number of years, even a small amount, you can shorten the term in the future without having as big an impact on monthly payments.
“Overpaying can also help reduce the amount of interest paid by shortening the overall term.”
Overpaying will also reduce the interest burden in the longer term and can also make the loan appreciate faster, opening up access to better deals.
Check your mortgage term
Every time you take out a new contract, you can view the term of your mortgage.
So even if you initially took the maximum term, it is always worth taking a closer look.
Karen said: “It may be affordable to shorten the term in the future, even a year or two can make a difference.”
Get mortgage advice
“Searching for the best rates helps not only in the beginning, but also each time a deal expires,” says David Hollingworth, deputy managing director of L&C Mortgages.
“Getting advice on the best deal for you can help minimize the need to extend the term, but will also ensure you keep it under review for years to come.”
A mortgage broker who can compare a much larger offer for you.
Some charge an additional fee, but there are plenty who provide free advice and are paid only on the lender’s commission.
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