Squeezed Homeowners Opt for Longer Mortgage Terms

As interest rates soar, homeowners facing the end of their mortgage deals are seeking relief through extended loan terms.

The trade association UK Finance reports that 24 per cent of remortgages, approximately 5,400 loans, were structured with terms of 30 years or more in December, a significant increase from 11 per cent in December 2021.

The surge in demand for longer mortgage terms comes as millions of homeowners grapple with the aftermath of interest rate hikes. Since the Bank of England base rate surged from 0.1 per cent in 2021 to 5.25 per cent today, borrowers who once enjoyed rates of 2.5 per cent or lower are now facing substantially higher payments. According to financial data firm Moneyfacts, the average two-year fixed-rate deal now stands at 5.81 per cent, with the average five-year fix at 5.39 per cent.

With approximately half of mortgaged homeowners witnessing the end of their deals amidst the base rate fluctuations, the financial strain is palpable. Santander customers, for instance, are grappling with an average monthly increase of £220 post-remortgaging, as highlighted by its chief executive Mike Regnier during recent parliamentary discussions.

Illustrating the impact of rate hikes, consider a scenario where a homeowner took out a £200,000 25-year mortgage at a rate of 2.5 per cent two years ago. Despite reducing the loan balance to £188,187 over two years, the rise in rates translates to increased monthly payments. For instance, with a rate of 5.81 per cent, monthly repayments over the remaining 23-year term would soar to £1,238.

In response, homeowners are turning to extending their mortgage terms as a means of mitigating the blow of higher rates. Extending the term to 30 years would lower monthly payments to £1,106, while a 35-year term would see them reduced to £1,049. Mortgage broker Katy Eatenton notes that term extension has become a primary strategy for borrowers navigating the current rate environment.

However, while extending the term provides short-term relief, it comes at a long-term cost. Comparing a 23-year term to a 35-year term, total repayments skyrocket from £342,601 to £441,764, despite the interest rate increase.

Despite these challenges, the proportion of loans in arrears only saw a slight uptick to 1.1 per cent at the end of last year, according to the Bank of England, signaling a resilient market amidst the economic turbulence.