Is a long or short mortgage term better?

When thinking about a mortgage, one of the main decisions you need to make is how long you want it for. This is known as your mortgage term and is the length of time you have to repay your mortgage.

A standard mortgage term lasts for 25 years. However, shorter terms are also available, such as 6 months or 5 years, as well as longer terms, such as 30 or 40 years. There are pros and cons to both ends of the scale but ultimately you need to ensure that you can repay your mortgage comfortably without paying more interest than is necessary.

An overview of the pros and cons

There are benefits and drawbacks to both term lengths:

A long mortgage term

Advantages:

• Your monthly payments will be cheaper
• You will be less affected by rate increases

Disadvantages:

• It will take you longer to repay your mortgage
• Your mortgage will be more expensive in the long run

A short mortgage term

Advantages:

• You will repay your mortgage faster
• Your mortgage will be cheaper in the long run

Disadvantages:

• Your monthly payments will be higher
• You will be affected more by rate increases

Short-term mortgages

Mortgages with a short term can be just 6 months in length. As long as you meet the lender’s criteria, you can opt for a short-term mortgage. The lender will check your income, expenditure and credit history among other factors to assess whether or not you can afford to repay the loan. If the lender decides you cannot afford the repayments – which are usually higher than for mortgages with longer terms – your mortgage application will be declined.

Why take out a short-term mortgage?

A short-term mortgage allows you to repay your loan faster. This means you can own your property outright much quicker than if you take out a standard or long-term mortgage. It also frees up your finances much sooner so you no longer have to worry about making monthly repayments.

As the loan stretches across a shorter term, you also pay less interest overall. This makes the total borrowing cost less than it would be with a mortgage spread over a longer term.

Short-term mortgages are also beneficial for older borrowers. Some lenders have maximum age restrictions when offering mortgages. A short-term mortgage, however, can allow you to secure a deal if you have retired or are about to retire.

A short-term mortgage can provide flexibility when your circumstances mean you have the ability to repay a mortgage within a few years but cannot guarantee that you will have the same income after that time. This scenario can apply to self-employed buyers, for example.

One drawback to a short-term mortgage is that your monthly repayments are likely to be higher. Another is that an increase in the interest rate may have more of an impact on you.

Types of short-term mortgages

Just like long-term mortgages, there are various types of short-term mortgages available, including interest-only, fixed rate, tracker and offset mortgages.

Interest-only mortgage: For this type of mortgage, you only pay the interest due each month. Your loan amount isn’t repaid until the end of your mortgage term. This is worth considering if you want to purchase a property and have funds elsewhere that you can access and use to repay the loan when the short term ends.

Fixed rate mortgage: With this arrangement, you can pay a set interest rate for a fixed period at the start of your mortgage. For example, 2, 3 or 5 years. When you choose a short-term fixed rate mortgage, the fixed period is determined according to your circumstances. This type of mortgage is good if you think you may need to move again in the not too distant future.

Tracker mortgage: A tracker mortgage tracks a certain interest rate, which is usually the base rate set by the Bank of England. You pay a fixed percentage on top of it. This means your payments can fluctuate as the base rate increases or decreases. While the base rate remains low, you can benefit from a low interest rate during your short mortgage term. Just ensure you can still afford your repayments if there’s a sudden increase in your interest rate.

Offset mortgage: An offset mortgage is linked to your savings account, the balance of which is offset against your mortgage loan. This means you pay less in interest. As a flexible mortgage, this type is often used to shorten a standard mortgage term but short-term offset mortgages are available as a specialist product.

A short-term mortgage vs overpayments

A short-term mortgage ensures your mortgage is repaid faster. It’s cheaper in the long run as you don’t pay as much interest overall. However, your monthly repayments will be higher. If you prefer to keep your normal monthly repayments lower with the option to make your term shorter, it’s worth asking your lender if you can make overpayments on a mortgage with a longer term.

This means you can either pay off lump sums or pay more than the monthly amount that’s normally due. The more overpayments you make, the quicker your loan is repaid and the shorter your mortgage term becomes. This also means you pay less interest overall. Check if you’re limited by how much you can overpay and whether you will incur any fees for making overpayments.

Which of these options is best for you depends on your circumstances. It’s a good idea to speak with a mortgage broker before making a decision.

Long-term mortgages

Long-term mortgages are available for between 30 and 40 years. As your mortgage debt is spread out over a much longer period, your monthly repayments are a lot lower than with a short-term mortgage. The downside to this is that you are stuck with that debt for a very long time and you end up paying more for your mortgage overall. Across the term of your mortgage, you shouldn’t be affected as much by changes to the interest rate as you would with a shorter term.

Their increased popularity

Mortgages with terms longer than 25 years have become increasingly popular with first-time buyers. This is mainly due to affordability issues. High house prices mean first-time buyers can’t necessarily afford the monthly repayments with a standard mortgage term. By taking a term of 35 or 40 years, however, this makes the monthly repayments lower and allows first-time buyers to get onto the property ladder.

The drawback to choosing a longer term means that more interest is paid and the debt becomes much bigger overall. It also means that you have the debt hanging over you for a lot longer and won’t own your home outright until it has been repaid. For example, if you purchase a property in Bexleyheath in 2021 with a long mortgage term of 35 years, your mortgage will be fully repaid by 2056. The prospect of having a mortgage for so long is not always seen as a negative, though. People are now working until an older age and there’s nothing to say that the state pension age won’t increase again.

Many lenders also allow overpayments to be made, usually up to 10% per year. This means that you can gradually pay off some of your mortgage loan when possible and reduce the term that way. This also helps to reduce the amount of interest payable overall. Another consideration is to remortgage at a later date when your circumstances have improved, such as receiving a higher income. That way, you can benefit from lower monthly repayments initially and then remortgage to a shorter term.

Which is best for you?

Whether a long or short mortgage term is best for you depends on your circumstances. It’s important to discuss this with your mortgage broker in Kent, London or Edinburgh first. If you have sufficient funds available to make higher monthly repayments and being able to clear your debt as soon as possible is important to you, then a shorter term is better. If it’s likely you won’t pass a lender’s affordability checks for a standard term and are not worried about having a mortgage for so long, then a long-term mortgage may be your best option.

When applying for Welling and Pimlico mortgages, speak with your mortgage broker about the different terms available. They will assess your circumstances and note your preferences before advising you on the best route to take. With access to all mortgage products, your mortgage specialist will be in the best position to find the one most suitable for you and ensure that your application is approved by a lender.