The mortgage term you choose affects not only how much you will pay each month, but also how long you’ll be paying it for and how much interest you’ll be charged over the life of the mortgage. Let’s dive straight in and find out more.
What is a mortgage term?
The mortgage term is the length of time within which you agree to repay your entire mortgage plus interest. It refers to the lifetime of the mortgage, rather than the length of time you sign up to a particular mortgage deal – a two-year fixed rate, for example.
What length mortgage term should I get?
Ultimately, this is a decision that depends on your own needs and circumstances. However, the average mortgage term traditionally lasts 25 years.
This is actually a good base to work from, because 25 years give you enough time that, spread out, your mortgage payments should be manageable, but it should also mean that you have repaid your mortgage before you retire.
Why do I need to be mortgage-free when I retire?
It’s not vital that you’ve paid off your mortgage before you retire, but it is advisable. This is because, once you leave employment, you will be relying on your state and/or private pension and any savings you have to cover all your outgoings.
Your mortgage is arguably your most important bill as it’s what pays for the roof over your head. It can also be your largest bill. If your income has fallen because you’ve retired, you may struggle to pay this and all your other bills too.
In April 2014, the Mortgage Market Review tightened up the rules mortgage lenders must follow. A priority for lenders today is that you can afford your mortgage payments, and if they can see that your mortgage eats well into your retirement years, they may worry you’ll struggle to keep up with the payments.
If you know that the length of mortgage you want will mean you have retired before you’ve finished paying it, you’ll need to be prepared to provide proof that you have the funds you need to keep paying your mortgage after this time. You can find out more about applying for a mortgage when you’re over 40 in this blog post.
Is a long mortgage best?
As we said, there’s no set rule saying you must take out a 25-year mortgage. You can choose a longer one, and there are mortgage providers who will agree to extend the term to 35 or 40 years.
The benefit of having a longer mortgage term is that you will pay less each month because your repayments are spread out over a longer period. However, paying your mortgage off for longer means you’ll end up paying more interest in total than if you’d chosen a shorter term. And you’ll have to consider whether you plan to retire before your mortgage term ends.
Should I choose a short mortgage?
The advantage of a short mortgage is that you’ll be debt-free and own all the equity in your home sooner. You will also be charged less interest overall because you’ll clear the debt in a relatively short time.
But again, for every advantage there is a disadvantage. The key drawback of a short mortgage term is that you will need to fork out quite a bit every month. If you struggle to meet this bill and start to fall behind, your home could be at risk of repossession.
What can you afford?
The best way to choose a mortgage term is to work out how much you can afford to spend each month. Chat with your lender about what this would add up to in terms of the length of your mortgage.
Remember, some mortgages allow you to overpay, which can shave time off your mortgage term and mean you pay the loan off sooner. And when a particular mortgage deal comes to an end, you can look for a new one with a different term depending on your needs and personal circumstances.
What length mortgage deal should I get?
There’s a lot of choice when it comes to specific mortgage deals. First, you need to decide whether you want a fixed-rate, tracker or SVR mortgage, and then decide for how long you’re happy to lock yourself into this deal.
Again, there are advantages and disadvantages to each, which you can find out more about by clicking on the individual links above. For example, if you choose a 10-year fixed-rate mortgage you have the benefit of knowing exactly what you will pay each month for the next decade, but you could miss out on any rate falls by locking yourself in for so long. And if you choose a two-year tracker, you might have the benefit of lower payments, but if interest rates go up so will what you pay.
You must carefully look at what’s on offer and weigh up what suits your needs the most and what you think you can afford.
We hope you’ve found this guide to mortgage terms useful. For more hints and tips on mortgages, keep checking the blog.
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Intelligent Lending Ltd (Credit Broker). Capital One is the exclusive lender.