Taking out a 35 yr mortgage? It could cost you 20% more

The Bank of England warned yesterday of the growing trend among banks and building societies to offer mortgages on longer terms of 30 or even 35 years.

This practice could "store up problems for the future", warned Sam Woods, head of the Bank's Prudential Regulation Authority in a speech on July 10.

One problem highlighted by Mr Woods was that borrowers' retirement finances would be eroded by repayments stretching into older age.

What he did not highlight, however, is the huge additional cost in interest born by borrowers who take out longer-term mortgages.

The traditional mortgage term has for decades been set at 25 years.

But with rising house prices, longer-term deals have been used as a way of reducing monthly mortgage outgoings and making home-buying more affordable.

Most major lenders will now offer terms of up to 35 years.

While monthly payments are lower, the overall cost to borrowers is far greater as interest compounds over a longer period.

Calculations below demonstrate how the lengthening of mortgage terms adds to the total interest bill.

Small mortgage

Assume a loan of £100,000, an upfront charge of £500 and interest rates averaging 4.5pc over the full term.

Over 25 years:

Monthly repayments average £556 and the total paid (interest and capital) is £167,250

Over 30 years:

Monthly repayments average £510 and the total paid (interest and capital) is £182,900

Over 35 years:

Monthly repayments average £473 and the total paid (interest and capital) is £199,250

Moderate mortgage

Assume a loan of £250,000, an upfront charge of £500 and interest rates averaging 4.5pc over the full term.

Over 25 years:

Monthly repayments average £1,390 and the total paid (interest and capital) is £417,350

Over 30 years:

Monthly repayments average £1,267 and the total paid (interest and capital) is £456,500

Over 35 years:

Monthly repayments average £1,183 and the total paid (interest and capital) is £497,400

Large mortgage

Assume a loan of £400,000, an upfront charge of £500 and interest rates averaging 4.5pc over the full term.

Over 25 years:

Monthly repayments average £2,223 and the total paid (interest and capital) is £667,500

Over 30 years:

Monthly repayments average £2,027 and the total paid (interest and capital) is £730,125

Over 35 years:

Monthly repayments average £1,893 and the total paid (interest and capital) is £795,550

The phenomenon of longer mortgage terms is common in countries where house price inflation has outstripped wage growth.

In Japan and Sweden, for instance, mortgages of over 100 years have been commonplace. Properties are, in these countries, often bequeathed to heirs with mortgages still outstanding.