Longer term mortgages offset stamp duty holiday savings for buyers - claim

The stamp duty holiday last year has caused a surge of borrowers taking on mortgages with terms of more than 35 years.

Wealth manager Quilter is warning that this could leave borrowers who have taken on these long-term loans to get on the property ladder vulnerable to higher costs.

A freedom of information request to the Financial Conduct Authority (FCA) by the firm found that there were 35,046 mortgages taken out with a term of more than 35 years in June 2021 – the end of the first stage of the stamp duty holiday last year.

That is a staggering 209% increase compared with 11,320 in June 2020. 

In September 2021, the final month before stamp duty rates reverted to their pre-pandemic levels, 28,112 mortgages were sold, a 73% increase compared with 16,066 in September 2020.

Charlotte Nixon, mortgage expert at Quilter says many people will have viewed the stamp duty holiday as an opportunity to purchase a larger, more expensive house than they would otherwise have been able to. 

In order to secure an affordable mortgage on the property, the figures suggest many opted to take out a longer mortgage term than they otherwise would have.

However, Nixon warns that in doing so they will have committed to paying a higher level of interest over the duration of their mortgage.

Despite the savings on stamp duty, which could have been a maximum of £15,000 in the first stage and £2,500 in the second, entering a mortgage term of 35 or more years will be costly given the amount of interest that will be paid over the duration of the term, Quilter warns.

For example, the overall cost of a 35-year mortgage term on the average home in September 2021, with a 15% deposit and a 2% interest rate, would be £383,732, according to Quilter.

Had the same property purchase been made with a 25-year mortgage term, the overall cost would be £311,220 – a  saving of £72,512. 

For the same scenario in June 2021, the overall saving would have been £66,914. 

The research doesn’t, however, consider whether borrowers will remortgage onto shorter terms in the future.

Nixon says: “The lure of the stamp duty holiday was strong, particularly as it came at a time when many people had built up extra savings due to the lockdown. While many jumped at the opportunity to save on stamp duty, they may well now be stuck in long mortgages that will cost them considerably more in the long term.

“Those who purchased a house for the average house price in June and September 2021 saved £3,283 and £2,499 on stamp duty costs respectively.

“But to take advantage of this saving many had to opt for a longer mortgage term to ensure it was affordable. 

“However, had they held off until they could afford a standard length mortgage, they could well have saved themselves a lot more money in the long run than just the stamp duty savings.”