How The Mortgage Term Affects The Cost Of Your Mortgage
30th May 2017
In general, making your mortgage term longer means lowering your monthly repayments, as repayments are spread over a longer period. However, a longer mortgage term means you’ll take more time to pay off your loan, so you’ll pay more interest overall.
With a longer term mortgage, your repayments are spread over a longer term. This means a lower cost per month but a higher cost overall.
With a shorter term mortgage, you’ll pay your mortgage off more quickly. This means a higher cost per month but a lower cost overall.
If your mortgage allows it, you can shorten your mortgage term (and reduce the total amount of interest you pay) by making overpayments. Be aware - some mortgage deals charge you for making overpayments.
If you have a repayment mortgage, you pay off a portion of the debt as well as interest when you make repayments. The mortgage term is the amount of time you have to pay off your loan, so if you make all your repayments, you’ll fully own your home by the end of the mortgage term.
Traditionally, a standard mortgage term is 25 years. A mortgage term of 20 years or fewer is seen as a short-term mortgage and a mortgage term of 30 years or more is seen as a long-term mortgage. However, mortgages with longer terms are becoming more common. In 2015, a quarter of first-time buyers took out mortgages with terms of 35 years, compared to 16% in 2007.
How your mortgage term affects your repayments
Increasing the term of your mortgage can lower your monthly repayments. For example, if you were buying a £250,000 property with a £75,000 deposit and a £175,000 mortgage, a term of 25 years could mean monthly repayments of £830. If you borrowed the same amount with a mortgage term of 35 years, you could expect monthly repayments of around £673. *This means that lengthening your mortgage term can help you meet the lender’s affordability criteria.
How your mortgage term affects the overall loan cost
Although a longer mortgage term means paying less each month, it also means paying more over the lifetime of the loan. This is because you’re paying interest over a longer period.
In the example we’ve just used, a 25 year mortgage term could mean paying total interest of £73,918 (assuming your interest rate stayed the same), while a 35 year mortgage term could mean paying total interest of £107,800 over the lifetime of the loan.
However, if you have a mortgage that allows overpayments, you can reduce this total amount by making overpayments as and when you can afford to, which shortens the total length of the mortgage.
£175,000 mortgage, interest rate of 3%
Remortgaging to pay less interest
Another way of reducing the amount of interest you pay is to remortgage each time your initial mortgage deal ends. Most lenders offer an initial discounted interest rate, but will switch you onto their more expensive Standard Variable Rate (SVR) when the initial period has finished. If you remortgage at this point, you can benefit from another initial deal, which can keep your interest rate relatively low.
Choosing your mortgage term
Trussle mortgage adviser Turon has some advice when it comes to deciding on a mortgage term.
‘When you’re thinking about the length of your mortgage term, it’s always important to make sure you can afford the monthly repayments, even if interest rates go up. A longer mortgage term could be worth considering despite the higher overall cost, especially if you’re unable to afford the repayments for a mortgage with a shorter term.’
As well as considering the monthly repayment amounts and the overall cost of your loan, you need to think about how old you’ll be at the end of the mortgage term. Most mortgage lenders set a maximum age, which is usually around 70 or 75. This means that the mortgage needs to be paid off by the time you reach this age. If you’re 40 years old now, you may only be able to take out a mortgage with a term of up to 30 years, for example.
*Note: This is a simplified example, assuming an interest rate of 3% over the course of the loan. In reality, mortgage rates will fluctuate during the lifetime of your loan.