The stamp duty holiday has triggered an increase in the number of homeowners taking out marathon mortgages, leaving many vulnerable to higher long-term costs, according to Quilter.
Chancellor Rishi Sunak introduced the tax relief in July 2020 to revive the housing market, which had stalled due to the pandemic. It was withdrawn in two stages in June and September 2021.
But the wealth manager says that at the two withdrawal stages, sales of mortgages fixed at 35 years or more jumped sharply.
In June 2021, 35,046 mortgages were sold with a duration of 35 years or more, up 209% against 11,320 in June 2020, indicates the firm, which obtained its data from the Financial Conduct Authority after a request for access to information.
In September 2021, 28,112 were sold, an increase of 73% compared to 16,066 in September 2020.
The survey highlights that alongside the increase in the number of mortgages sold, average house prices rose rapidly throughout 2021. Upon the final withdrawal of the stamp duty exemption in September 2021, the price average accommodation had reached £287,8951, an 11.8% increase on the previous year.
He says: “Many people will have seen the stamp duty holiday as an opportunity to buy a bigger and more expensive house than they otherwise might have.
“In order to secure an affordable mortgage on the property, the figures suggest many have opted to take out a longer term mortgage than they otherwise would have. However, by doing so, they will have committed to paying a higher level of interest over the term of their mortgage.
He adds: ‘Despite the stamp duty savings, which could have been a maximum of £15,000 in the first stage and £2,500 in the second, going into a mortgage of 35 years or more will be costly considering given the amount of interest that will be paid over the term of the mandate.
A house bought in June 2021 at an average price of £265,668 would have cost £88,438 on a 35-year mortgage, at 2% interest with a 15% down payment. The stamp duty saving would have been £3,283. However, the same property bought on a standard 25-year loan would cost £66,914 over its term.
He adds that a house bought in September 2021 at an average price of £287,895 would have cost £95,837 on a 35-year mortgage, at 2% interest with a 15% down payment. The stamp duty saving would have been £2,499. However, the same property purchased on a standard 25-year loan would cost £72,512 over its term.
Charlotte Nixon, Quilter’s mortgage expert, says: ‘The lure of the stamp duty suspension was strong, especially as it came at a time when many people had accrued extra savings due to the locking.
“While many jumped at the chance to save on stamp duty, they may now be stuck in long mortgages that will cost them much more in the long run.
“Those who bought a house at the average house price in June and September 2021 saved £3,283 and £2,499 on stamp duty respectively. But to take advantage of this saving, many had to opt for a longer-term mortgage to ensure it was affordable.
“However, if they had waited until they could afford a standard length mortgage, they might well have saved a lot more money in the long run than the stamp duty savings.
“It made little sense to stretch mortgage terms to take advantage of stamp duty savings, but the data suggests that many people have been doing this as maturities approached.
“The overall cost of a 35+ mortgage may have been an afterthought for those looking to take advantage of the scheme, particularly when rushing to meet withdrawal deadlines.
“However, rushing to buy will not have resulted in the savings that many thought they would get, as they will now be faced with the cost of interest over the term of a longer mortgage.”