Buying a home is one of the biggest financial commitments many people will make. So it’s important to understand not just the terminology used surrounding mortgages, but what mortgage type is right for you. One phrase you need to understand is the notion of a mortgage ‘term’. In this article we’ll discuss what a mortgage term is and the benefits of both long- and short-term mortgages. We’ll then discuss how to determine which term is best for you.
What is a mortgage term?
Simply put, a mortgage term is the length of time the mortgage loan is borrowed for. If the mortgage term is more than 30 years, this is referred to as a long-term mortgage. A mortgage term of less than 20 years is a short-term mortgage. The term you choose for your mortgage is an important factor in getting a mortgage. There are benefits to both long- and short-term mortgages. So, individuals should determine which is the best option for their circumstances.
Benefits and limitations of long-term mortgages
The longer your mortgage term is, the lower your monthly payment will be, usually. This is because the value of the loan is spread across more years. Long-term mortgages are often popular with first-time buyers for this reason. Any rise in interest rates has less of an impact on long-term mortgages. It should not cause great hikes in monthly payments.
Despite these benefits, there are some drawbacks to long-term mortgages. As payments are made for more years, more interest is paid overall. This means that the total amount paid back on the mortgage loan is significantly more than on short-term mortgages. Another factor to be considered is that long-term mortgages result in individuals having mortgage debt against their name for longer.
Benefits and limitations of short-term mortgages
On the contrary to long-term mortgages, with short-term mortgages, less is paid in interest over the full term. Individuals will have mortgage debt against their name for a shorter period of time. They will therefore own their property outright sooner, which brings its own financial benefits.
Conversely, in order to pay the mortgage off sooner, monthly payments will be higher than for longer-term mortgages. Should there be a rise in interest rates, this could impact short-term mortgages more significantly.
No matter your choice of a short- or long-term mortgage, your choice of fixed, variable or tracker mortgage will determine how soon an interest rate change will impact you. If your current mortgage deal is fixed at a set rate for 5 years, for example, the rate rise will not impact you until your current deal comes to an end. Those with variable-rate or tracker-rate mortgages will feel the impact sooner.
Is a long-term or short-term mortgage better?
It is not possible to categorise one mortgage term type as better than the other. This very much depends on the financial circumstances of the individual. To ensure you are making the best decision for you, contact a mortgage advisor such as Bell Mortgage Solutions. Mortgage advisors will use their expertise to guide you to the right mortgage for you.
Mortgage calculators such as the one available at MoneySavingExpert* enable you to look at different mortgage terms. They will give an indication of how monthly payments and the overall amount paid will change dependent on the term. It’s important to include considerations of rate increases during your mortgage term, and what this will do to your monthly payments.
A further consideration when determining your mortgage term should be when you are hoping to have paid off your mortgage in its entirety. For example, should you wish to retire in 22 years time, mortgage-free, you should look at shorter-term mortgages.
On top of your own considerations, mortgage lenders may also have some stipulations. Depending on your age, some mortgage term options may not be available to you. Some lenders may have restrictions on how old you can be at the end of your mortgage term. Once retired, for example, you may not be able to afford the same payments, as your income is likely to be lower. Therefore lenders may require your mortgage to be fully paid off by the time you reach state pension age.
Can you change your mind on mortgage terms?
If your financial or other circumstances change over the course of your mortgage term, there are opportunities to make a change. You can make a change to your mortgage at any time. However, there may be fees to pay if your mortgage deal is not at an end.
End of mortgage deal
When your current mortgage deal is coming to an end, you could take the opportunity to reduce your mortgage term. For example, if you initially take out a 25-year mortgage on a 5-year fixed term deal, after this deal is over, you could:
- take out a new 25-year deal. This will keep your monthly payments low. Your mortgage will be completely paid 30 years after the initial mortgage was taken out.
- arrange a new mortgage deal based on a 20-year term. The mortgage will still be paid off 25 years after the initial mortgage was taken out. You will therefore be mortgage-free at the same age as you originally planned for.
Overpayment
Should you have disposable income available, you may choose to make an overpayment on your mortgage. Many vendors may impose a restriction on how much can be overpaid each year without incurring a fee. This could be 10% of the total mortgage value, for example.
By overpaying on your mortgage you can reduce the mortgage term. You will therefore pay off the balance sooner, and pay less in interest, as well as overall. Overpayments allow for flexibility in your mortgage. They allow you to take advantage of the benefits of a long-term mortgage, but bring the total mortgage value down when possible, too.
How Bell Mortgage Solutions can help you
As we have discussed, different mortgage terms will be more suitable for different individuals. The team at Bell Mortgage Solutions will work with you to determine your circumstances and requirements. We’ll use this information to find the best solutions for you, regarding mortgage terms and mortgage types. We’ll support you in finding the right mortgage deal to suit your needs. Contact us to arrange an initial conversation.
Please note: Your home may be repossessed if you do not keep up repayments on your mortgage.
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The information contained within was correct at the time of publication but is subject to change.
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