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Homeowners who take out ultra-long mortgage deals are unknowingly falling into a void that can cost them tens of thousands of pounds more in interest payments.
In recent years there has been an increase in the number of mortgages that let customers spread repayments over 35 years or more. High house prices have forced borrowers to pay back their loans over a longer period in order to keep monthly repayments at a manageable level.
However, industry experts have warned that consumers may have sleepwalked into these deals without realising the true cost, as thousands of loans were taken out without proper financial advice.
The hidden cost can be enormous. Analysis for Telegraph Money by Quilter, the wealth manager, shows that an average first-time buyer who purchases a house worth £193,701 will pay £80,000 more if they spread repayments over 35 years than over the traditional term of 25 years.
The buyer would pay a total of £391,364 for their mortgage, compared with £312,821 if they had a more typical length of deal.
Emma Leonard, a 24-year-old apprentice electrician, bought her first home last year and was forced to sign up for a 40-year term, even though the cost will be much higher.
“I was on a low wage and the only way to afford the monthly payments was to take out the longest mortgage,” she said. “Otherwise it would have been too much to pay back every month.”
Miss Leonard, from Ramsgate, Kent, took out the loan using Trussle, a mortgage broker, and hopes to save money by switching to a shorter-term deal at a later date.
But many existing homeowners may be unaware of the repercussions of such long loans.
A Freedom of Information request to the City watchdog, the Financial Conduct Authority, uncovered the fact that before 2014, when new rules were introduced, as many as one in five 35-year mortgages was taken out without financial advice.
This means thousands of people may be unwittingly short-changing themselves over the coming decades.
Gemma Harle of Quilter warned that longer-term mortgages were a false economy for many homeowners.
“If you had an option to buy the same item for 20pc less, you would take it in a heartbeat,” she said. “But the exact opposite is happening when it comes to buying a home. We are seeing a growing trend of people taking longer-term mortgages, with 35 and even 40-year terms on the rise.
“This is a slippery slope for homeowners, who will pay tens of thousands of pounds more, potentially without realising it.”
Figures compiled for this newspaper by Moneyfacts, the data provider, show that in 2014 just 1,217 mortgage deals allowed the applicant to spread their loan over 40 years. That figure has since ballooned to 2,783, meaning that 55pc of all mortgages now allow borrowers to spread out their repayments over four decades.
Last week, one specialist lender, Hodge, launched a fixed-for-life mortgage for customers aged 50 and over. While the deal is intended to give homeowners certainty over their interest rate, customers could ultimately be paying off their mortgage for 50 years or more.
Earlier this year the regulator proposed easing its rules to allow more people to take out a mortgage without advice, potentially allowing buyers to shun bank branches and brokers in favour of unadvised online deals. Ms Harle warned that this would cause a “dangerous” surge in the number of unsuitable mortgages being taken out.
Homeowners who already have an ultra-long term can take steps to rectify their situation. For some, house price growth and increased earnings may allow them to remortgage and shorten their term in future.
Making overpayments, whether regular or one-off, will also reduce the overall amount of interest paid to the bank. Typically borrowers can repay up to 10pc of the balance outstanding in any given year without penalty.
However, borrowers who do this should ask their bank to keep their standard payments at the same level to ensure that the loan is paid off more quickly.
Devraj Ray of largemortgageloans.com, a broker, said: “Borrowers might not realise that when they overpay, banks tend to reduce their ongoing monthly payments rather than reduce the mortgage term. The fastest way to be mortgage-free is to keep your repayments at the same level and reduce your term.”
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