I was reading the other day about a new way to get a mortgage, yet bring down your monthly payments. Hey presto! Homebuyers can now afford that dream home and first time buyers can now get their foot on the property ladder. So what is this miracle solution to the ever-increasing cost of being a homeowner? A 40 year mortgage. Thats right... spread the payments for an extra 15 years and you can now afford much more! Great news? Not really. Just look at the cost of it longterm using our example below: A mortgage for £100,000 at 6% for 30 years would have a monthly payment of around £600 for principle and interest. So, you would pay around £216,000 over the 30 years, of which £116,000 would be interest on the loan.
The same mortgage over 40 years would attract higher interest. This is typically an additional 0.25% - 0.50% on top of your usual rate of interest. Therefore, your monthly payments have now dropped to £565. Thus, the total amount payable over the lifetime of the loan (40 years remember!) would be a staggering £271,200 of which £171,200 would be purely interest.
The higher interest of the 40 year loan, coupled with the additional 10 year span means you, the borrower, is paying 47% more interest, or in money terms £55,000 more over the 40 years that the loan runs. Yes, thats right.. you are paying an additional £55,000! And why is this? Well, just so you can bring down your monthly payments by £35 a month. Seems the lender is getting an awfully good deal at our expense!
What you need to do is condition yourself to think of the overall cost, not just the monthly payment costs. It is the total cost which you will be paying back to the lender, so you would want to keep this as low as possible. The focus on the monthly payment takes attention away from the total amount to be repaid. You need to look at this with any indebtedness, car payments, personal loans, credit cards: figure the total cost, not just what you pay each month.
Im sure given time, these long term mortgages will become more and more common as a way to tempt first time buyers onto the property ladder. But, think about it before you commit yourself to a long term agreement like this. You main aim should be to become debt free and to achieve this in as short a time as possible. You wont be doing that with a 40 year mortgage, and you will end up paying a small fortune in interest if you do.
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Dow Jones