Choosing the right mortgage term is a vital part of getting a mortgage. Here is how to work out how long you need to pay off your mortgage, and make sure you don't pay more in interest than you have to.
It’s not always easy to know what mortgage term you should go for when making a mortgage application. This guide explains all you need to know.
|Cheap monthly payments
|More expensive overall
|Rate rises have less effect
|Takes longer to pay off
|Higher monthly payments
|Quicker to pay off
|Rate rises have more effect
The mortgage term is simply the length of time over which you repay your mortgage. You’ll be able to choose your term when you apply.
For example, if you took out a 25-year mortgage in 2021 and made all of the repayments on time, your mortgage would be paid off in full by 2046.
If you are applying for your first mortgage:
A term of fewer than 20 years would be a short-term mortgage
A term of 30 years or more would be a long-term mortgage
The minimum mortgage term you can find is usually two to five years, but it is possible to find mortgage terms for as little as six months.
At the other end of the scale, the maximum mortgage term you can get is around 40 years.
This will depend on your circumstances, but it’s worth keeping the following in mind when making your decision:
Longer-term mortgages cost less per month because the repayments are spread over a longer-term. However, this means that your mortgage will cost you more overall because you will be charged more interest over a longer period.
Shorter-term mortgages have higher monthly repayments, but this means you’ll pay off the balance quicker. As a result, you’ll own your home outright much sooner and pay less in total because you won’t be charged as much interest.
Let’s look at an example. Paying off a £160,000 mortgage with an interest rate of 4% would cost:
Everyone has different financial circumstances. What may be best for one person may not be ideal for another. So the best mortgage term is one that results in affordable monthly repayments but does not have you paying more in interest than necessary.
Again, the answer will depend on your personal circumstances and financial situation. To help you, it’s worth using a mortgage calculator to try different term lengths and find out how much it will cost you each month and over the entire term.
Choosing a 25-year term will be cheaper in the long run, but make sure you can afford the higher monthly payments. If a shorter term makes repayments too expensive, consider the longer 30-year term.
If interest rates go up later, your repayments will increase more if you have a shorter term, so make sure you consider rate rises when you budget for your mortgage.
As well as considering your budget, you might want to look ahead to when you would ideally like to be mortgage-free. For example, if you plan to retire in 25 years and want to be mortgage-free by then, you could choose a 25-year term if you can afford it.
When lenders decide if they will accept your application, they look at your finances and make sure you can afford the repayments.
If you choose a short term that comes with repayments you cannot afford, your application will likely be rejected.
Some lenders will only offer mortgages that you will pay off before retiring. Others state that their mortgages have to be paid off before you reach a maximum age.
This means that older borrowers will only be able to get short term mortgages with these lenders. Here is how to find a mortgage when you are older.
If you already have a 25-year mortgage and switch to a new one, for example, after five years, you can either:
Take out another 25-year mortgage to lower your monthly repayments
Take out a shorter-term mortgage, e.g. 20 years
If you can afford to, taking out the shorter-term deal is the ideal option as it means you will still own your home 25 years after you bought it.
However, if your financial situation has changed, for example, you’ve had a salary cut, you may feel you need to increase the length of your mortgage term to make repayments more affordable. If your financial situation has improved when you next come to remortgage, you can always reduce the term again.
Some mortgages let you make overpayments, which means paying more than the amount due each month or paying off a lump sum.
Making overpayments has the same effect as shortening the mortgage's term - the balance is paid off quicker, and you pay less interest.
However, the benefit is it gives you more flexibility because you can choose when you overpay. In comparison, having a shorter term means you have to pay a higher amount every month.
Check if your lender allows overpayments, if you can make them without paying a fee and if there is a limit to how much you can pay. Many lenders will allow you to pay 10% of the total mortgage balance as an overpayment each year, penalty free.
As well as considering the overall term of your mortgage, think about how long the initial rate will last. This could be two, three, five or ten years. This rate can:
Be fixed for several years
Track another rate like the Bank of England base rate
Stay a certain amount below the lender's variable rate
If you get a fixed rate that lasts for several years, your interest rate and the amount you pay each month will stay the same, even if most other rates rise.
Here is how to decide on the type of interest rate you want and how long it should last.