Higher payment vs. longer mortgage term
What a lower monthly payment really costs once the term is stretched by ten years.
Why does a longer mortgage cost more?
With a mortgage you choose a term as well as an amount and a rate, and it is the term that sets the monthly payment. Extending it lowers the payment, which sounds like a saving. This tool shows what sits behind that: how much extra a lower payment costs over the life of the mortgage.
Interest is not charged on the amount originally borrowed but on what you still owe. Every instalment therefore splits in two: one part covers the interest for the month just gone, the other reduces the debt. And there is the whole trick, a lower instalment leaves less to reduce the debt with.
The debt falls more slowly, so next month the interest is charged on a higher balance. And on top of that the whole thing lasts longer. A lower instalment therefore pays interest on a higher debt for a longer time, and both work against you at once.
A lower instalment is not a cheaper mortgage
The monthly instalment and the cost of the mortgage are two different things. The instalment says how much housing weighs on you each month. The cost of the mortgage is set by the interest paid, and that rises with a longer term even as the instalment falls.
Stretching the term is not a discount, it is a deferral. You pay for a more comfortable monthly budget in extra interest.
A simple example
Where the monthly instalment comes from
The instalment is an annuity, the same throughout the term. It is worked out so that in exactly N months it clears both the principal and all the interest:
P is the amount borrowed, i the monthly rate (the annual rate divided by twelve) and N the number of instalments. The denominator grows more and more slowly as instalments are added, and that is exactly why stretching the term lowers the instalment far less than you would expect. Doubling the term is nowhere near halving the payment.
When a longer term does make sense
A lower monthly payment is not a discount, it is a deferral. You pay for the easier monthly budget in extra interest. That does not make the shorter term always right: a higher payment eats into your monthly buffer and can become a problem in a bad month. What decides it is what you do with the difference. Spend it and the longer mortgage genuinely costs you more; invest it consistently and the outcome depends on the return you achieve.
Common mistakes
Related tools
- Mortgage calculatorThe instalment, the total overpayment and the repayment schedule for one mortgage.
- Early mortgage repaymentWhat an overpayment does to the length of repayment and to the interest paid.
- Invest or repay the mortgageThe same question about spare money, only with a lump sum instead of an instalment.
- Rent or buyA step earlier: does taking a mortgage make sense at all, or is renting better?
Related terms
Related topics
Terms that come up in this calculation
- AnnuityA series of regular payments of the same size at equal intervals. On a loan it is the instalment that never changes for the whole of the repayment.
- AmortisationPaying off a debt gradually through regular instalments. Each instalment covers the interest first and reduces the principal with what is left, and the balance between the two shifts over time.
- PrincipalThe amount you actually borrowed and have to return. Interest is the price of borrowing it, and it is always calculated on whatever of the principal is still outstanding.
- Interest rateThe price of borrowed money expressed as a percentage per year. It says how much extra you pay if you borrow or how much extra you receive if you are the one lending.
- APRCThe annual percentage rate of charge. A single figure expressing the total cost of a loan including fees, which is why loans compare better by it than by the interest rate.
Calculators that follow on from this one
- MortgageWork out your monthly mortgage payment, the total interest and the LTV, with a full amortisation schedule, overpayments and side-by-side scenarios.
- Early repaymentFind out how much an overpayment on your mortgage could save, and whether shortening the term or lowering the payment serves you better.
- Compound interestWork out how an investment grows under compound interest, including regular contributions, the effect of inflation, and a year-by-year breakdown.