An Introduction to Extending the Term of Your Mortgage

When it comes to managing your mortgage, one question that frequently arises is whether you can extend your mortgage term. Extending the length of your mortgage can be a useful strategy for managing monthly repayments. However, there are various factors to consider before making this decision, including potential costs and longer term financial implications.

Why Consider Extending Your Mortgage Term?

One of the main reasons homeowners consider extending their mortgage term is to reduce their monthly mortgage payment. By spreading the total principal repayment over a longer period, the monthly mortgage payment decreases, which can ease financial pressure in the short term.

For example, if you have 15 years left on your mortgage but extend it to 25 years, your monthly payments will decrease. This is particularly helpful if your financial situation has changed due to reduced income, an increase in living costs or unexpected expenses. According to the Bank of England, interest rates have risen significantly since December 2021 driven by the need to combat high inflation. The base interest rate increased from 0.1% in mid-December 2021 to 5.25% in early-August 2023, leading to higher borrowing costs for homeowners. As a result, mortgage payments increased for many households. In fact, the Bank of England estimated that by mid-2023, about 4 million mortgage holders had seen their monthly repayments rise due to rate hikes. Extending the mortgage term could provide relief by lowering your immediate outgoings.

The Long Term Cost of Extending a Mortgage

One of the key trade-offs when extending your mortgage term is the total amount of interest you will pay over the life of the loan. Mortgage lenders charge interest on the outstanding balance of your loan. Extending the term means you will be making payments over a longer period, which often leads to paying more interest overall, even though your monthly payments are lower.

Let us consider an example to illustrate the point:

• Imagine you have a £200,000 mortgage with 15 years remaining at an interest rate of 4%. Your monthly mortgage payment would be approximately £1,479, and you would pay around £66,300 in interest over the 15 years.

• If you extend the term to 25 years, your monthly mortgage payment would reduce to around £1,056. However, the total interest paid over the extended term would rise to approximately £116,700 – an increase of over £50,000 in total interest paid as compared to the previous 15-year term.

As can be seen, while the immediate benefit of a reduced monthly payment is attractive, the increase in the long term interest cost can be significant.

Who Is Eligible to Extend Their Mortgage Term?

The eligibility to extend your mortgage term depends on several factors, including your lender's policies and your personal circumstances. Many lenders will allow you to extend your mortgage term, but they will assess a variety of factors before approving the extension.

Age Limits

One of the main factors lenders consider is your age. Most lenders have a maximum age limit for borrowers by the time the mortgage term ends, typically between 70 and 75 years. For example, if you are 60 and you want to extend your mortgage by 20 years, this could be problematic because many lenders might not be comfortable extending the term beyond your 70th or 75th birthday.

Affordability Assessment

Another key consideration is whether you can still meet affordability requirements. When you apply to extend your mortgage, your lender will typically re-assess your financial situation. This includes looking at your income, outgoings and any changes to your employment status. Even if you are seeking to reduce your monthly payments, lenders must ensure that you can afford the new repayment schedule under current regulatory requirements.

The Process of Extending a Mortgage

If you decide that extending your mortgage term is the right option for you, the process typically involves contacting your lender to discuss your situation. Here is a step-by-step guide to what you can expect:

1. Contact Your Lender: The first step is to contact your mortgage provider and ask if they offer term extensions.

2. Affordability Assessment: Your lender will likely require updated financial information, such as proof of income and details of your outgoings, to ensure you still meet their lending criteria.

3. Credit Check: Your lender may conduct a credit check to determine your financial health. A poor credit score may impact your ability to extend your term.

4. Agreeing on Terms: Once approved, your lender will offer you new terms. Be sure to check the total cost of the mortgage, including how much more you will pay in interest.

5. Legal Changes: In some cases, especially if you are changing your mortgage amount, you may need to amend your mortgage deed, which could incur some legal costs.

6. New Repayment Schedule: Once the extension is approved and all paperwork is completed, you will begin making payments according to the new repayment schedule.

Alternatives to Extending a Mortgage Term

Extending your mortgage term is not the only way to reduce monthly payments or manage mortgage costs. There are several other strategies that might work for your circumstances:

Overpaying

If you are in a financially stable position, making overpayments when you can afford them could help reduce your mortgage balance and monthly mortgage payments without needing to extend the mortgage term. By overpaying, you can reduce the balance faster and also save on interest. Some lenders allow overpayments of up to 10% of your mortgage balance each year without incurring any penalties.

Interest-Only Mortgage

An interest-only mortgage could be a temporary solution to reducing monthly costs, though it is a more extreme option and not widely recommended for most borrowers. In this type of arrangement, you only pay the interest each month, leaving the principal untouched. However, you will eventually need to repay the principal, which could leave you with a large liability at the end of the term.

Is Extending Your Mortgage Term the Right Choice?

Whether extending your mortgage term is a smart move depends on your financial circumstances, long term plans and lifestyle needs. While it can provide short term relief by lowering monthly payments, the increase in total interest payments can be significant. Before deciding, it is essential to evaluate the potential long-term financial impact carefully and explore other options that might be available, such as making overpayments.

For many, the decision will come down to balancing immediate financial relief with long term costs. Consulting a financial advisor or mortgage broker can help you make the best choice based on your unique circumstances.

Ultimately, while extending your mortgage term is possible for many homeowners, it is a decision that should not be taken lightly. By understanding both the benefits and the potential pitfalls, you can make a more informed decision that aligns with your financial goals.

FAQs:

Q. Can I extend my mortgage term?

A. Yes, in many cases, you can. However, the ability to extend your mortgage term depends on your lender’s policies and your personal circumstances, such as your age and financial status. It is important to check with your lender to confirm if extending the term is possible for your mortgage.

Q. Will extending my mortgage term reduce my monthly payments?

A. Yes, extending your mortgage term will generally reduce your monthly payments since the repayment of the loan balance is spread over a longer period. However, while your monthly payments might be lower, you will pay more in interest over the life of the loan. It is important to weigh the short term relief against the long term costs.

Q. How much can I extend my mortgage term by?

A. The length of time by which you can extend your mortgage term will depend on your lender's policies and your personal circumstances, such as your age and financial profile. Most lenders set a maximum age limit, typically between 70 and 75 years, by which the mortgage must be repaid. Therefore, the extension will usually be constrained by such factors.

Q. Do I have to undergo affordability checks when extending my mortgage term?

A. Yes, lenders will typically reassess your financial situation through affordability checks when you request a mortgage term extension. This includes reviewing your income, outgoings and overall financial health to ensure you can meet the new repayment schedule under the extended term. A credit check may also be part of this process.  

Q. Can I extend my mortgage term if I am nearing retirement?

A. It may be possible to extend your mortgage term if you are nearing retirement, but lenders are generally cautious about approving extensions that would extend past retirement. Most lenders have a maximum age limit for mortgage repayment, typically between 70 and 75 years. However, some lenders offer more flexible options, especially if you have sufficient retirement income to cover the repayments.

Sources:

Why are interest rates high and how quickly might they fall? | BoE | Published Nov 2024