Choosing the length of time it will take you to pay off your mortgage is sometimes overlooked. Typically, our attention is focused on the type of mortgage: should you go for a repayment or interest only deal? A fixed rate or a variable rate? But deciding on the length, or term as it is known, is an important part of your budgeting.
How to choose your mortgage term
Traditionally mortgages have been for 25 years and that is still the standard term in the UK, but long term mortgages of up to 40 years are becoming popular and are readily available. This trend can be explained by the significant rise in house prices in recent years, which have not been matched by growth in wages. This means, particularly for first time buyers, it is hard to meet the affordability requirements demanded by lenders, so a mortgage of a longer term and with reduced monthly repayments can be a good option.
The benefits of a long term repayment mortgage are that the monthly payments are cheaper and interest rate rises will have less effect. However, the downside is that by the end of the term, the amount of interest that you will have paid will be far greater because the loan is repaid over a longer period. It will also take longer to build up equity in your property.
Who can take out a long term mortgage?
These longer term deals have come about to make monthly mortgage payments more affordable for first-time buyers, generally people in their twenties or thirties. Lenders usually want the term to end before you reach retirement, or their maximum age, so older borrowers can find it difficult to find a lender. It may be possible if you can show that your retirement income will be sufficient to make the payments for the duration of the term.
It is worth checking if your lender allows you to make overpayments without penalties, so that if you receive a windfall or if you are able to afford more each month, you can pay this off and reduce the length of the loan. This flexibility can be very useful over the life of these longer terms.
Our Lighthouse mortgage advisers can work alongside you to calculate how your monthly payments would vary with different terms. They will look at the impact on the overall cost of the loan. They will consider any potential changes in your circumstances and help you find a lender with a deal to suit your situation. As your mortgage approaches its final years we can advise if you can reduce the term, so that you’ll pay less interest and become mortgage free sooner.
Buying a home is a significant milestone and exploring all your options before you choose a mortgage provider and suitable product makes good sense.
Important Information: Your home may be repossessed if you do not keep up repayments on your mortgage.