"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"
- Rachel Springall - Moneyfactscompare
New analysis from Moneyfactscompare suggests that longer-term mortgages could offer a route to lower monthly costs for first-time buyers, particularly amid ongoing affordability challenges. Borrowers opting for a 40-year mortgage term could reduce monthly repayments significantly, although the overall cost over time would be higher.
Based on current Moneyfacts data, a borrower taking out a £250,000 mortgage at the average interest rate of 5.05% could save £255 per month by choosing a 40-year term instead of a 25-year one. The trade-off is a longer repayment period and increased interest over the life of the loan.
Borrowers who choose longer terms are not locked into them permanently, however. They can opt to make regular or occasional overpayments, which can reduce both the length of the mortgage and the amount of interest paid overall. A £200 monthly overpayment on a 40-year, £250,000 mortgage could cut nearly 13 years off the term and save more than £123,000 in interest.
“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,” said Rachel Springall, finance expert at Moneyfactscompare.co.uk. “Those prioritising their homeownership plans over their pension may well choose a longer-term mortgage to more comfortably afford mortgage payments.”
She continued, “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.”
One way to manage these longer terms, Springall explained, is through overpayments. “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.”
Springall illustrated the benefits with a practical 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%. 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.”
The traditional 25-year mortgage term has become less common. “A maximum mortgage term of 25 years would have been relatively standard in the past, particularly when house prices were lower,” Springall noted. “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.”
Springall also pointed to structural issues in the market. “The latest reviews into stress testing are important, and the legacy of these tests is designed to protect borrowers, but it’s important that loan-to-income (LTI) tweaks are considered to be reflective of the changing mortgage market,” she said. “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 concluded, “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.”
