40 Year Mortgage Term v 25 Year Mortgage Term
Published / Last Updated on 29/11/2023
Given higher mortgage interest rates and high property prices, many people are struggling to get on the property ladder with mortgage affordability and many existing borrowers are struggling with increased mortgage costs when they come to remortgage.
We won’t call it ‘ingenuity’ as it is not, but at least it is a solution with some lenders now offering 30, 35 and 40 year mortgage deals. With that in mind, we decided to compare costs and interest paid for 25 year term mortgage versus a 40 year mortgage term.
The following results were found for a £150,000 mortgage with a fixed rate at 5% pa on a capital and interest (repayment) basis.
|
|
25 Year Mortgage |
40 Year Mortgage |
Difference |
|
Monthly Repayment |
£876.89 pm |
£723.29 pm |
-£153.60 pm |
|
Total Interest Paid over the term |
£113,065.52 |
£197,181.55 |
£84,116.03 |
|
Total payments made by end year 5 |
£52,613.10 |
£43,397.69 |
-£9,215.41 |
|
Mortgage Balance at end year 5 |
£132,870.28 |
£143,315.35 |
£10,445.07 |
|
Mortgage outstanding at end year 25 |
£0.00 |
£91,464.43 |
£91,464.43 |
These figures show us that by extending your mortgage to 40 years rather than the typical 25 years means you pay 74.40% more in additional interest payments. Even after just 5 years, your mortgage balance will still be nearly 7% higher at £10,445.07.
If you are forced into having a 40 year mortgage due to affordability tests, make sure once you are ‘in’, you try to make as many additional payments as you can. If you win on the lottery, if relatives give you cash for birthdays or Christmas, make an overpayment on your 40 year mortgage. Usually most lenders will allow overpayments of up to 10% of the outstanding balance.
In addition, in this example, at the end of year 25, you will have paid your mortgage off with a 25 year deal but with a 40 year deal, you will have paid off 39% or your mortgage and still owe 61% of the orginal capital borowed.
Allowing for Property Price Inflation: Looking back 50 years
By taking a 40 year mortgage term, it will have got you on the property ladder and if house prices continue to rise at a 9.3% pa average (as they have done over the last 50 years – source PropertyIndex.co.uk June 2022), your 9.3% pa property growth will have outstripped your 5% pa mortgage so you will still be in a better position if you had chosen a 40 year mortgage rather than renting.
Allowing for Property Price Inflation: Looking back 30 years
By taking a 40 year mortgage term, it will have still got you on the property ladder but house price rises have slowed to a 5.3% pa average (in the last 30 years – source Moneyvator August 2022), your 5.3% pa property growth will have only just pipped your 5% pa mortgage so it is debateable whether you should have bought or rented but at least you will be building up equity when renting is usually ‘dead money’.
