Can you extend your mortgage term to lower your monthly payments?

Can you extend your mortgage term to lower your monthly payments?

With the current high cost of living, you’ve no doubt been looking for ways to reduce your outgoings. Your mortgage repayments are likely to be your biggest monthly cost, so how can you lower the amount to pay? One way is to extend your mortgage term. Here, we’ll explain what that means, the pros and cons, how to go about it and the alternatives to consider.

What does it mean to extend your mortgage term?

Mortgage terms in the UK have traditionally been for 25 years. However, longer terms are offered by lenders, such as 35 or 40 years, and these are becoming increasingly popular. In recent years, more and more borrowers have been taking out mortgages with long terms of 35 years. This reduces the monthly repayment amount, helping borrowers to keep their heads above water in the current climate. Longer terms don’t just apply to those taking out new mortgages, though.

If you already have a mortgage, you can increase its term. This gives you a longer period to spread the loan repayments over and, as a result, you have lower monthly payments. Just bear in mind that interest becomes payable over the longer term so you’ll end up paying more overall.

A temporary mortgage term extension

Rather than wishing to extend your mortgage for a long period, such as 10 years, you may prefer a shorter extension just to give you a bit of breathing space with your finances. The Mortgage Charter was introduced earlier this year to help those struggling with their mortgages. One of the measures detailed in this charter is to extend your mortgage term, provided that you’re up-to-date with your mortgage payments.

So that you have the option to make this a temporary measure, you can contact your lender within 6 months and revert to your original term. You won’t need to go through new affordability checks and your credit score won’t be affected. If, however, you decide to revert to your original term after 6 months, you’ll need to pass an affordability check.

The benefits of extending your mortgage term

There are various advantages to extending your mortgage term:

  • Spreading your loan over a longer period reduces your monthly repayments, adding a bit of flexibility to your budget.
  • You may have additional costs to cover and need to free up some of your monthly outgoings.
  • If you have an interest-only mortgage, an extension gives you more time to save to repay the loan at the end of the term.
  • Your fixed-rate deal may be nearing its end and you’re concerned about the affordability with a standard term if the rates are higher.
  • If you’re struggling to make your monthly payments, you can prevent the possibility of going into arrears.

The drawbacks of extending your mortgage term

Whilst a term extension offers different benefits, there are disadvantages to consider before going ahead:

  • Interest is charged across the longer term so your loan becomes significantly more expensive overall.
  • It takes a lot longer before your loan is repaid and you own your home outright.
  • Some lenders set restrictions for mortgage term extensions, such as a maximum age limit.

How easy is it to extend your mortgage term?

Most lenders allow mortgage term extensions although they have varying requirements. You usually need to be up-to-date with your mortgage payments — some lenders won’t consider an extension if you’re in arrears. Lenders also usually check your affordability before approving an extension. As your repayments will be lower after a term extension, this shouldn’t be an issue but they’ll need to take your age into account. They’ll be more cautious about your affordability for the repayments the nearer you are to retirement age. Many lenders won’t extend your term beyond your 75th birthday.

Your preferred term extension will also be taken into account as lenders have different limits when it comes to the maximum repayment term. If, for example, you already have a 35-year term, you’ll only be granted an extension if your lender offers terms of up to 40 years.

Other ways to reduce your monthly payments

If you want to lower your monthly costs but are not sure whether a term extension is the right solution for you, there are some alternatives to consider.

  • Switch to an interest-only deal. Having an interest-only mortgage means that you only pay the interest due on the loan each month, you don’t repay any of the capital. The capital is repaid at the end of the mortgage term so you need to make sure that you have the funds to do this at the time. Switching to an interest-only deal is also a measure included in the Mortgage Charter. It allows you to change to an interest-only mortgage for 6 months without being penalised.
  • Remortgage to a deal with a better rate. You can remortgage to a better deal that offers a lower interest rate, which will reduce your monthly payments. However, as rates are currently high, you may only benefit from a better deal if you’ve already paid off a significant amount of your mortgage and don’t need to borrow as much. The lower the loan-to-value (LTV) ratio, the better the rates you’ll be offered.
  • Equity release. If you’re over 55, you can benefit from an equity release product, such as a lifetime mortgage. With a lifetime mortgage, you’ll not only have access to the equity that has built up in your home but the loan won’t be repaid until you either go into long-term care or pass away.
  • Another option is to sell your existing home and move into a smaller one. Your mortgage loan will be a smaller amount, resulting in lower monthly repayments.

Should you extend your mortgage term?

Ultimately, whether or not you should extend your mortgage term depends on your situation. If you’re struggling to keep on top of your payments then it’s a good solution. However, if you can manage as you are, then try not to extend the term. The extra interest charged will be significant and it’ll be a lot longer before you can benefit from financial freedom.

Before making a decision, get in touch with our mortgage brokers on 01322 907 000. They’ll discuss all of the options available to you so that you can weigh up the differences between them. That way, you can be sure to make the right choice, both for your immediate financial needs and your future goals.