31 July, 2008
In recent months around one in every ten homeowners coming out of a fixed rate mortgage deal have been left no choice but to extend their mortgage or switch to an interest only deal, comments Forbes' Peter Toner.
An ever increasing number of homeowners are extending their mortgage to cut repayments in order to cover rising mortgage repayments, food, utility and fuel costs but re-mortgagers who push out their mortgage term should be aware that to do this in the long term will cost them more.
A homeowner who has a mortgage of £150,000 could reduce their monthly outgoings by extending their term by five years. They could for example change from a 20 year term to a 25 year term. The monthly repayment mortgage payment, with an interest rate of 6%, would in this instance be reduced by £108.20 per month.
This monthly saving could be most welcome in these testing times. However, it would cost a huge £32,019 extra over the increased mortgage term.
Any homeowner with good net Disposable Income should seriously think about not increasing their term but reducing it. This would have the effect of dramatically reducing the amount of interest paid throughout the term. This can be done by either making regular overpayments or reducing the mortgage term. This makes particular sense if significant monthly amounts are being ploughed into savings that are achieving a smaller growth rate than the mortgage interest rate being paid.