Taking out a 35 yr mortgage? It could cost you 20% more


The Bank of England warned yesterday of the growing trend among banks and building societies to offer mortgages on longer terms of 30 or even 35 years.

This practice could "store up problems for the future", warned Sam Woods, head of the Bank's Prudential Regulation Authority in a speech on July 10.

One problem highlighted by Mr Woods was that borrowers' retirement finances would be eroded by repayments stretching into older age.

What he did not highlight, however, is the huge additional cost in interest born by borrowers who take out longer-term mortgages.

The traditional mortgage term has for decades been set at 25 years.

But with rising house prices, longer-term deals have been used as a way of reducing monthly mortgage outgoings and making home-buying more affordable.

Most major lenders will now offer terms of up to 35 years.

While monthly payments are lower, the overall cost to borrowers is far greater as interest compounds over a longer period.

Calculations below demonstrate how the lengthening of mortgage terms adds to the total interest bill.

Small mortgage

Assume a loan of £100,000, an upfront charge of £500 and interest rates averaging 4.5pc over the full term.

Over 25 years:

Monthly repayments average £556 and the total paid (interest and capital) is £167,250

Over 30 years:

Monthly repayments average £510 and the total paid (interest and capital) is £182,900

Over 35 years:

Monthly repayments average £473 and the total paid (interest and capital) is £199,250

Moderate mortgage

Assume a loan of £250,000, an upfront charge of £500 and interest rates averaging 4.5pc over the full term.