If you're worried about making your mortgage payments, reach out to your lender to discuss
It sounds like you, like a lot of homeowners, are having to make some very stressful decisions right now. The Bank of England recently predicted that more than 1 million households will see their monthly mortgage payments go up by more than £500 by 2026. It’s a very challenging time for a lot of people.
That means what you’re doing – carrying out research and asking for support so you can make informed decisions – is the right thing.
But before we dive into our discussion about extending your term, I’ll just say: if you are worried about your ability to make your mortgage payments, you should discuss with your lender.
They might have other options or supports that you’re not aware of, and it’s always best to have those conversations early, when you have the most options available to you.
Let’s dive in.
What does it mean to extend your mortgage term?
Every lender has a maximum lending age that ultimately limits your maximum mortgage term. If you’re 35 when you buy a home and your lender’s maximum lending age is 75, you’d feasibly be able to get a 40 year mortgage. That would be your maximum term, and you wouldn’t be able to extend it beyond that.
Many people opt for 30- or 35-year mortgages in the beginning, as a shorter term means you’ll pay less interest over time. This is because a longer mortgage term means you’ll pay more in interest over time.
That gap – between 30 and 40 years, in our example of a 35-year-old buyer – represents your wiggle room to extend your mortgage term (with the consent of your lender, of course).
Why would I extend my mortgage term?
Extending your mortgage term can be a useful tool for people that want to reduce their monthly mortgage payments.
Because you’re extending the mortgage over a longer period, you can pay back your capital loan amount in smaller fragments each month with proportionally lower interest payments to boot.
This can reduce strain on your monthly budget, which might be really beneficial for many homeowners in periods of economic turbulence like this one.
But there is a downside. We’ll get to that in a minute.
Using the mortgage charter to extend your term
The government’s mortgage charter lays out that homeowners who extend their term can, within 6 months of requesting the extension, revert to their original term. While we haven’t signed the charter, we’ve also implemented this measure.
Any portion of your monthly payments that you deferred during the term extension will still be payable, and you’ll have to work out the terms of that repayment with your lender.
This option could be very beneficial for someone whose circumstances have recently changed, like if they’ve been laid off but feel very confident they’ll be able to find another job within that 6 month window.
But if you’re struggling to afford your mortgage and you don’t know when it’ll be easier to manage, a permanent mortgage extension might be more appropriate for you.
Your lender will be able to run different scenarios so you can figure out if it’s possible to extend your term or how far you’d like to extend it for the best possible outcome.
But! As I said earlier, there are downsides.
If you can afford to make your mortgage payments, it’s probably best that you don’t use this measure so you can avoid paying all that extra interest.
Who shouldn’t extend their mortgage term?
There are people this strategy won’t work for.
For example, if your mortgage term already matches up with your lender’s max age, you won’t be able to extend your mortgage further. (If you have a Gen H mortgage with an income booster, it may be possible to remove your booster to extend your term.)
The other thing to consider is that extending your mortgage term means you’ll pay way more in interest over time. For a lot of people, this just doesn’t match up with their financial goals.
For example, according to MoneySuperMarket’s calculator, if you take out a £200,000 repayment mortgage over a 25 year term at 4.5% (and assuming you stay at 4.5% for the whole mortgage), your monthly payments will be about £1,111.66 and you’ll pay back a total of £333,499.99 over those 25 years.
That’s your £200,000 mortgage plus £133,499.99 in interest payments.
Now let’s say you extend your £200,000 mortgage out over 35 years at 4.5% for the whole time. Your monthly payments will be £946.51 (lower, yay!), but you’ll pay back a total of £397,535.66.
That’s your £200,000 mortgage plus £197,535.66 in interest payments. That’s a difference of £64,035.67
Imagine what your retirement would look like if you’d paid that extra £63,000 into your investments or pensions instead?
So, there’s a choice to be made. If extending your term means you can stay in your home and that is your top priority, this could be a good option for you.
But if you can afford to make your mortgage payments, it’s probably best that you don’t use this measure so you can avoid paying all that extra interest.
Reverting to your original term
You may be able to change your mortgage term again in the future – for example, extending it today to lower your monthly payments and in 5 years’ time reduce your term again.
But you’d have to pass affordability checks to do this and your monthly payments would go up when you do.
Depending on interest rates in the future, you could find yourself in a similar position to where you are today – worried about making your payments.
But, in the future, if your budget is a bit more comfortable, you might be able to combat the increased interest you’ve accrued by extending your term with overpayments.
Most lenders offer the option to overpay a percentage of your mortgage every year, which goes directly onto your principal loan balance and not your interest. With us, every year you can overpay by 10% of the balance of your loan at the time you started your interest rate.
If you consistently overpay your mortgage balance, you might be able to make up for having extended your term to begin with.
Hopefully this discussion has shown that extending your term is not a silver bullet. In my opinion, the best thing you can do for your finances and your future is get in touch with your lender to chat through all of your options.
If you’re a Gen H customer, I really recommend you get in touch with our servicing team. If you’re with another lender, you should reach out to them for guidance. If you’d like external financial support, you can review our money worries page.
Just remember that you’re not alone, and this isn’t a decision you need to make by yourself. Hang in there!