First-time buyers (FTBs) could save £255 a month by choosing a 40-year mortgage term instead of a 25-year term, based on borrowing £250,000 at 5.05%, analysis from Moneyfactscompare.co.uk showed.
According to Moneyfacts, a longer term means lower monthly payments, which could help buyers struggling with affordability.
A regular overpayment of £200 a month on a £250,000 mortgage could reduce a 40-year term by nearly 13 years and save more than £123,000 in interest.
Rachel Springall, finance expert at Moneyfactscompare.co.uk, said: “As consumers work for longer it’s easy to see why the majority (85%) of mortgages allow them to push their term to 40 years.
“Those prioritising their homeownership plans over their pension may well choose a longer-term mortgage to more comfortably afford mortgage payments.
“However, being asset rich and cash poor in retirement can lead to borrowers paying their mortgage for longer, incurring more interest and eventually they may turn to equity release to boost their disposable income.”
Springall added: “One way new buyers could afford monthly mortgage repayments would be to choose a longer-term.
“However, those monthly savings come at a cost and borrowers with lengthier mortgages will make monthly repayments for longer and incur paying considerably more mortgage interest overall, so making overpayments to reduce the term and interest incurred is wise.
“For example, those who decide on a 40-year term mortgage instead of a 25-year term can reduce their monthly payment by £255 per month, if they borrow £250,000, based on the Moneyfacts Average Mortgage Rate of 5.05%.”
She said: “However, if borrowers with a 40-year term can afford to overpay by £200 per month, it could shave almost 13 years off the mortgage term, saving them around £123,000.
“Typically, lenders allow borrowers to overpay by 10% of their outstanding mortgage, but some may allow more.
“A maximum mortgage term of 25 years would have been relatively standard in the past, particularly when house prices were lower, but the majority (68%) of first-time buyers are now taking out mortgages with a term of 30 years or more, according to the Financial Conduct Authority (FCA).”
She added: “Affordability remains a key issue and it’s stretching new buyers, with the Bank of England noting the average deposit paid by first-time buyers was around 60% of their household income in 2024.
“The latest reviews into stress testing are important, and the legacy of these tests are designed to protect borrowers, but it’s important loan-to-income (LTI) tweaks are considered to be reflective of the changing mortgage market.
“It is understandable that renters may want to take the leap into homeownership, especially when Zoopla revealed that average rents are up £221 per calendar month over the last three years.”
She said: “However, the demand for affordable housing remains a crippling issue for new buyers, which is why they will be hoping the Government can make its ambitious target of 300,000 homes to be built each year a reality.”
