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.
|Cheap monthly payments||Mores expensive overall|
|Rate rises have less effect||Takes longer to pay off|
|Cheaper overall||Higher monthly payments|
|Quicker to pay off||Rate rises have more effect|
When you apply for a mortgage you can choose how long you have to pay it off.
Standard mortgage terms are 25 years, but you can get one that lasts between six months and 40 years in the UK.
For example, if you took out a 25 year mortgage in 2010 and made all of the repayments, it would be paid off in full by 2035.
If you are getting your first mortgage:
A term of less than 20 years would be a short term mortgage
A term of 30 years or more would be a long term mortgage
If you already have a 25 year mortgage and switch to a new one, for example after five years, you can either:
Take a 20 year mortgage so you still own your home 25 years after you bought it
Take a longer or shorter term mortgage instead
Longer term mortgages cost less per month because the repayments are spread over a longer term. However, you pay more overall because you are charged more interest over a longer term.
Shorter term mortgages cost more each month but let you pay the balance off quicker. This means you own your home outright much sooner and pay less in total because less interest is charged.
For example, paying off a £160,000 mortgage with an interest rate of 4% would cost:
|Mortgage term||Monthly payment||Overall cost|
Everyone has different financial circumstances. What may be best for someone 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.
Use a mortgage calculator to try different term lengths and find out how much it will cost:
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.
Decide how long you want to repay your mortgage as well. For example, if you 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 are able to afford the repayments.
If you choose a short term that comes with repayments you cannot afford, it is likely your application will be rejected.
Some lenders will only offer mortgages that will be paid off before you retire and sometimes they have to be paid off before you reach a maximum age.
This means that older borrowers can only get short term mortgages with these lenders. Here is how to find a mortgage when you are older.
Some mortgages let you make overpayments. This 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 will be paid off quicker and you pay less interest.
However, it gives you more flexibility because you can choose when you overpay, but 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.
You can get mortgages that come with an initial interest rate for up to 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 rates
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.
If you're a first time buyer or looking to move house or remortgage, we can help you find the best mortgage deal to suit your needs.