Does a mortgage in the UK pay off?

Over the period 1995-2022, the average mortgage interest rate in the UK was 5.62%. This means that by paying off an average 25-year mortgage with an initial value of £200,000, you would pay a total of £372,765 back to the bank. Does this amount make a mortgage unaffordable? Does the equivalent amount borrowed in the form of interest make renting more viable? Let’s find out!

If you are considering taking out a mortgage in the UK, read on for the most common questions about buying a property.

Mortgage interest - should I be afraid of it?

In the introduction, we stated that a very large part of the instalments you pay on your mortgage is interest. We would be lying if we portrayed the matter differently, however, it is worth looking at the other side of this coin. In the rest of this article, we’ll give you the reasons why taking out a mortgage can be worthwhile. Later, we will also point out the disadvantages of this solution.

UK mortgage - advantages

1. Inflation works in your favour

Inflation is a phenomenon that primarily works in favour of investors and debtors. Practically every year, the prices of goods and services rise, which accumulates over the years - if next year, inflation is 10% and the following year it falls to 5%, in two years’ time, prices will be around 16% higher than today. Over the period 1989-2024, the average inflation rate was 2.83%. This means that over the last 25 years, shop prices have risen by almost 101%. Recall - in the form of interest, you would have given back just over 86%. Time and inflation work in favour of borrowers.

Inflation works in your favour

2. Abandoning your mortgage, you will remain a tenant for the rest of your life

Unfortunately, everyone has to live somewhere and unless you have received a property as an inheritance, your home will have to be bought or rented.

When you decide to take out a mortgage, you are taking on the repayment of your home over the coming 20, 25, sometimes 30 years. Initially, you will be required to make a deposit, which will often be between £10,000 and as much as £20,000, and then over many years, you will be paying the bank an amount comparable to, or even higher than, the rent for a comparable home. In return, once you have paid the final instalment, you will have very noticeably reduced your fixed expenses, allowing you to pursue your dreams or change to a less demanding job.

The only situation beyond your control where your mortgage instalment may increase is if the Bank of England increases the interest rates it sets. However, these cannot rise indefinitely and typically, take a value between 0.00% and around 6.00%. This means that mortgage instalments will not go up every year in the same way as, for example, the price of products in shops or the rent of housing.

The same cannot be said for rents. Today, and so in September 2024, the average rent is £231 per week, whereas in 2009, it was just £153. Over the course of several, and certainly several, years, the rent of a property is increasing, something that cannot be clearly stated for mortgage instalments.

3. By repaying your mortgage, you build your wealth

Although a mortgage is a form of debt, it is also a tool that can be used to build wealth. From the first repayment, you gradually increase your wealth. The capital you have accumulated can be used to free you from renting, but you can also sell the house you have paid off and, having raised several hundred thousand pounds, live the rest of your life without worrying about your pension or income from other sources.

By repaying your mortgage, you build your wealth

4. Mortgage is the only way to borrow money to buy a property in the UK

Buying a house in the UK requires a significant amount of money - property prices in England have exceeded the average value of £285,000 and are unlikely to fall. It will probably take you decades to set aside such a sum in a savings account, and borrowing these funds from family or friends is basically unattainable.

Mortgages are also a much cheaper form of borrowing than credit cards or non-bank loans. Looked at this way, a mortgage is pretty much the only rational way to buy a house unless you have a really substantial amount of cash.

5. By skilfully using a mortgage, you are able to pay an instalment lower than a rent

From time to time, we’ve mentioned on our blog the benefits of using remortgaging, i.e. switching mortgages for cheaper rates. The essence of this solution is to switch banks when the LTV ratio of your mortgage falls below a certain threshold - then, you are able to take advantage of better offers and get a lower interest rate. This translates into instalments and also allows you to shorten the repayment period. After just a few years, you will notice that you are paying less for your own home than for renting a similar property.

By skilfully using a mortgage, you are able to pay an instalment lower than a rent

6. Paying off your mortgage will give you more stability than renting

A number of things have to happen to get you out of your mortgaged home and you, as the borrower, must not show any willingness to cooperate with the bank. This is a significant difference to renting, which, although often stable, is still a less secure option. Your landlord can terminate your lease if he feels he is able to get more from another tenant.

7. You have time to build your pension

By spreading out the repayment of your mortgage over a number of years, you reduce your regular fixed costs, which, with a little financial discipline, will allow you to save regularly. Even small amounts of £30 or £50 a month can accumulate into a really substantial sum years later.

You have time to build your pension

The interest on a mortgage is therefore, in a sense, a fee for the opportunity to save - by spreading the repayment of the commitment over many years, you give yourself the space to set aside funds for the future that will ensure a dignified old age, an adequate level of treatment when it comes and a good start for your children.

Disadvantages of mortgages in the UK

Unfortunately, in some aspects, mortgages can also be disadvantageous.

1. The mortgage ties you to the property you bought

It takes an average of three months to buy a house in the UK and just under that to sell. So if you decide to move, you need to expect to wait a minimum of two, and realistically three or four, months to sell your current home. Add to this the time it takes to buy a new property - that’s another weeks.

The mortgage ties you to the property you bought

A mortgage can in part restrict your freedom, making it difficult to move after a job, for example. However, if you use a professional mortgage broker and a trustworthy estate agent, swapping your home for a new one doesn’t have to be that difficult at all.

2. Mortgage is a risk of rising interest rates

Although, looking ahead to the year ahead, we should expect interest rate cuts rather than increases. However, it should be noted that the Bank of England can, in theory, raise interest rates indefinitely - for the record, they have been at 17%, which on a model mortgage (25 years, £200,000 borrowed capital) translates into £862,677.95 to repay.

Current economic realities mean that such a radical increase in interest rates would wreak havoc on the UK economy, but it is not inconceivable that at some stage in the repayment of your home you will be handing over more to the bank than you currently are.

3. There are investments that can give you a higher rate of return

Mortgages are an alternative to renting and many people see buying a property as an investment - the common perception is that houses and flats in the UK have become and will continue to become more expensive indefinitely. This stance is backed up by statistics - 22 years ago, the average house in the Isles cost around £110,000 and our country’s population is growing year on year. This gives an average of 2.1% growth per year.

There are investments that can give you a higher rate of return

Note, however, that the property market is no longer growing as much as it was just a few years ago, and the population is ageing. At the same time, statistics show that over the last 30 years, US equities.) have gained an average of 9.9% a year. So if you had invested £110,000 22 years ago, today you could expect to make an astronomical £878,000. We cannot suggest that such a situation will repeat itself, but history shows that investing in property is less profitable.

What can I do to make a mortgage more affordable for me?

Above all, you need to approach the management of your finances sensibly and look for savings. Over 25 years, even the slightest optimisation makes a difference.

Remember the possibility of doing a remortgage

You will most likely opt for a mortgage with an interest rate frozen for two or three years. For this period, the repayment terms will be attractive, but when the initial agreement with the bank ends, the interest rate is likely to rise, which will increase your instalment. This is exactly the point at which it’s worth switching banks or deals - you’re likely to reduce your interest rate or pay off your home faster this way.

Remember the possibility of doing a remortgage

Take out a mortgage for as short a time as possible

If you decide to spread the repayment of your mortgage over a number of years, you need to be aware that an important part of your instalments will be interest. By deciding to make even subtle changes to your mortgage schedule, you can generate some really impressive savings, which the table below will illustrate:

Repayment period: 25 years 24 years 23 years Instalment amount: £1,242.55 £1,266.40 £1,292.64 Total amount donated: £372,764.64 £364,722.93 £356,769.12 Savings generated £0 £8,041.71 £15,995.52 For our calculations we have assumed a mortgage amount of £200,000 and an interest rate of 5.62%. You can make your own calculation using the tools on the Moneyhelper website.

Don’t buy an overpriced property

Just because you’re able to get a mortgage for £300,000 doesn’t yet mean that’s how much you should borrow. Many people go into too much debt, taking on unnecessary liabilities, which puts a strain on their household budget. It’s better to start with a smaller house and sell it to buy a bigger one if necessary.

Read more:

• Buy To Let Mortgage

• Right To Buy

• Right To Acquire