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What Is A Mortgage Term And How Does It Work?
A mortgage term is the amount of time over which you must repay your mortgage, plus interest, and any additional fees. You will be able to select your preferred term when you apply with a mortgage lender.
As an example: If you took out a 25-year mortgage in 2022, and paid all your monthly payments on time, your mortgage will be paid off by 2047 and the property will be completely yours.
You can also take out an interest-only mortgage. In these cases, the initial term is how long you will pay interest on the loan, without actually making any repayments. It could be a few years – even up to a decade. By the end of the interest-only term, you need to start with monthly repayments as well as the interest.
Differences between mortgage terms and mortgage deals
A mortgage term is only the period within which you must complete all your mortgage payments.
A mortgage deal is the entire mortgage package that you discuss with the lender, including the interest rates and any other conditions related to your mortgage payments. These deals often include additional incentives, like cash-back offers for timely payments or discounted interest rates for initial repayments.
What Are Minimum And Maximum Mortgage Term Lengths?
A 25-year mortgage term used to be the standard, but today your mortgage broker will offer you various terms to suit your needs and budget.
Shorter terms are typically between two and five years, although even six-month mortgages are sometimes available.
But, as house prices increase, buyers are looking for longer terms to afford property.
At the other end of the spectrum, you will find up to 40-year mortgage terms; however, these are considered “extended mortgages.”
What is an extended mortgage term?
Any mortgage term over 25 years is considered an extended term. Not many mortgage lenders will offer terms exceeding 25 years, although some brokers like Nationwide, Yorkshire Building Society and Halifax offer these extended terms.
Pros and cons of short mortgage terms
Pros
- Usually reduced total amount
- Pay it off in a shorter period of time
Cons
- Monthly instalments are higher
- Interest rate increases will have a greater effect
Pros and cons of long mortgage terms
Pros
- More affordable monthly payments
- Interest rate rises have less of an effect
- Easier to pass an “affordability assessment” from lenders because of lower monthly repayments
Cons
- The final repayment amount is higher since you pay more interest overall
- Takes much longer to repay, meaning you are in debt for longer
How Do Mortgage Terms Affect Your Interest Rate?
A longer mortgage term means you will have lower monthly payments, as you are spreading the total cost over a longer period.
But, since you are making more payments, it means you will also be paying more interest over the course of the longer time period.
And it can definitely add up. For example, let’s say you are borrowing £200,000 with a fixed rate of 3%:
- Over 25 years, you will have monthly repayments of about £948.10, meaning you will pay £284,430 in total.
- Over 40 years, you’ll have a monthly payment of £740.61, meaning you pay £355,248 in total.
That is a massive difference.
Of course, interest rates can be fixed or variable, and your mortgage can be either interest-only or a repayment mortgage. In these instances, the interest is calculated differently:
- For a repayment mortgage, your interest is calculated on what you have left to pay.
- For an interest-only mortgage, the interest is calculated on the full outstanding amount (until you begin making repayments).
Are Short- or Long-Term Mortgages Better?
What is best for you will depend on your personal circumstances. Here are some things you need to keep in mind when deciding:
- A long-term mortgage has a lower monthly payment as payments are spread over a longer period. However, in the end, your mortgage will cost more as you incur more interest.
- A shorter-term mortgage means you will have a high monthly payment, but the mortgage loan is repaid quicker and your final amount will be less, due to less interest charged.
Your current and future financial circumstances will determine whether higher monthly repayments but a shorter term are preferable to lower repayments but a longer repayment term.
How Do I Decide On My Mortgage Term?
When you apply for a mortgage you will have to decide on the length of time you want to be making monthly repayments.
It would be best to chat with your mortgage broker about your options to decide on what is best for you.
A trustworthy broker or advisor will take your circumstances into consideration, as well as the affordability of the mortgage, and suggest the best option and how you can keep your repayments down.
Usually, the shorter the term, the better, as you will save money by paying less interest and getting rid of your debt quickly. But of course, you might not be in a financial situation where you can make the higher monthly payments.
If that is the case, or you are a first-time buyer, then a longer term may be more suitable. You are able to step onto the property ladder while having lower repayments to worry about.
FAQs
Can I shorten an extended-term mortgage?
You may have initially taken out an extended-term mortgage and want to shorten it. You can do this by remortgaging your home. This is a good option if your financial situation improves or you inherit some money, for example.
Do overpayments affect my mortgage term?
It will depend on your mortgage deal. If you are able to, you can make overpayments (meaning you pay more than the agreed-upon monthly amount) which shortens your term as you are quickly clearing your debt.
Just note that there are restrictions on overpayments. If you exceed a certain amount (determined by your deal), you can face a penalty, especially if you have a fixed-term mortgage.
Final Thoughts
Your mortgage term is incredibly important, as it determines how much your monthly repayments are, how much interest you pay, and when you will clear your debt.
There is no “best” mortgage term. Typically in the UK, terms are around 25 years; however, you can shorten or extend your term when you apply for a mortgage to establish a deal that works for your situation in the present and future.
Additional Sources:
https://www.money.co.uk/mortgages/a-complete-guide-to-mortgages
https://www.money.co.uk/mortgages/should-you-get-a-long-or-short-term-mortgage
https://wismortgages.co.uk/how-long-is-a-mortgage-in-the-uk
https://www.nerdwallet.com/uk/mortgages/what-is-a-mortgage-term/