The stamp duty holiday triggered a surge in homeowners taking out marathon mortgages leaving many of them vulnerable to higher costs over the long term, according to Quilter.
Chancellor Rishi Sunak introduced the tax relief in July 2020 to kickstart the housing market, which had ground to a halt due to the pandemic. It was withdrawn in two stages in June and September 2021.
But the wealth manager says at both withdrawal stages, the sales of mortgages set at 35 years or more jumped markedly.
In June 2021, 35,046 mortgages were sold with a term of 35 years or more, up by 209% compared with 11,320 in June 2020, says the firm, which obtained its data from the Financial Conduct Authority after a freedom of information request.
In September 2021, 28,112 were sold, a 73% increase compared with 16,066 in September 2020.
The survey points out that alongside the increase in the number of mortgages sold, average house prices rose rapidly throughout 2021. By the final withdrawal of the stamp duty holiday in September 2021, the average house price had hit £287,8951, an 11.8% increase compared to the previous year.
It 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, in doing so they will have committed to paying a higher level of interest over the duration of their mortgage.”
It adds: “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.”
A home bought in June 2021 at an average price of £265,668 would have cost £88,438 over a 35-year mortgage, at a 2% interest rate with a 15% deposit. The stamp duty saving would have been £3,283. However, the same property bought over a standard 25-year loan would cost £66,914 over its term.
It adds a home bought in September 2021 at an average price of £287,895 would have cost £95,837 over a 35-year mortgage, at a 2% interest rate with a 15% deposit. The stamp duty saving would have been £2,499. However, the same property bought over a standard 25-year loan would cost £72,512 over its term.
Quilter mortgage expert Charlotte 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.
“It made very little sense to stretch the mortgage terms to benefit from the stamp duty savings, but the data suggests that’s what many people did as deadlines approached.
“The overall cost of a 35-year-plus mortgage may well have been an afterthought for those looking to take advantage of the scheme, particularly when rushing to meet the withdrawal deadlines.
“However, rushing to buy will not have resulted in the savings many believed they were securing, as they will now be faced with the cost of interest for the duration of a longer mortgage term.”
