Let’s take the example of a buyer taking out £250,000 loan at a rate of 3.5pc.
Over a 25-year term the buyer would expect to pay £1,252 per month, repaying £375,596 in total. By contrast, the same loan over a 40-year term would have lower payments of £969 per month, but the overall cost would be far higher – £465,098.
This basic example assumes interest rates remain the same for 25 years. Were rates to rise, the cost of a long-term loan would be even more.
Yet, people are being forced into these extended terms as high house prices make it so difficult to get onto the ladder otherwise.
Can taking a long-term mortgage ever work out cheaper?
If a buyer is expecting a cash windfall, perhaps through inheritance, that can be used to help remortgage to a shorter, cheaper deal at a later date.
But for most buyers, the best plan is to try and make overpayments whenever there is the spare cash to do so. Especially if the alternative is effectively paying off somebody else’s mortgage by renting a property.
Even paying a small amount extra each month could save thousands in the long run. Buyers will pay down the debt faster, allowing them to access more attractive deals in future and, most importantly, enjoy a mortgage-free retirement.