Longer mortgage terms are becoming increasingly popular and with their lower monthly payments its no surprise. But how do you know what mortgage term is really right for you?
Working out which sort of mortgage to go for can be a difficult process. You've got tracker rate mortgages, variable rate mortgages and fixed rate mortgages to choose from. On top of that, you've got to decide on the actual term of the mortgage - in other words, how long it will take you to clear the outstanding balance.
For a long time, it was the given thing to go for a 25-year term for your mortgage. However, in recent years the typical term being asked for from buyers has been growing.
In fact, data from mortgage brokers L&C last year suggested that the number of first-time buyers opting for a mortgage term of between 31 and 35 years has doubled over the past decade. To help you decide the right term for you, let's take a look at how the length of your mortgage term affects your payments.
The longer the mortgage term, the smaller the monthly repayments
Clearly, many of those people taking their first step onto the property ladder are being tempted by the big selling point of a longer mortgage term - smaller monthly repayments. Because you are spreading the total repayment of the mortgage over a longer period, the monthly cost of your mortgage falls.
Let’s say that you are buying a house with a £150,000 mortgage, with a current interest rate of 2.5%. If you go for a 25-year term then that will mean monthly repayments of around £678 a month.
But if you go for a longer mortgage term, that will mean much lower monthly repayments. For example, with a 30-year term, those monthly payments fall to £597, while a 35-year term would see those repayments drop down to £540.
If you are looking to buy a house at the moment, this can be a big selling point. House prices continue to rise; the latest data from the Office for National Statistics suggests that annual price growth is at 4.4%, taking the average house price to around £225,000.
With wages certainly not rising at anything like that rate, you aren’t alone if you’re worried about how to make the sums add up.
So if you think you might struggle to afford the monthly repayments that would come with a 25-year term, a longer term on your mortgage may make the bill much easier to meet.
But the longer the term, the larger the bill overall
While a longer mortgage term will mean smaller monthly repayments, it will also mean actually paying off that mortgage costs considerably more overall.
Because it takes longer to clear the balance, interest is charged against that debt for a longer period, costing more in the long run.
Let’s go back to our example. With a £150,000 mortgage and a 25-year mortgage term, you would pay a total of £203,532 over the lifetime of that loan - in other words, around £53,500 in interest.
But if you moved to a 30-year term you would have to spend £214,920, while a 35-year term will cost a total of £226,800.
A long mortgage term isn’t (necessarily) for life
One thing you should bear in mind when making your decision is that the length of your mortgage term can be changed along the way.
Let’s say that you go for a 30-year term on your first mortgage, with a five-year fixed rate. When the fixed rate period ends you may decide to remortgage. By this time you will have paid off some of your outstanding balance and your house may also have risen in value. In this situation, you will be borrowing at a lower loan-to-value (LTV) than when you originally took out your mortgage. This means you may have a better range of deals to choose from as mortgage lenders tend to offer better rates to those with a lower LTV.
As a result, you may be able to afford to opt for a shorter mortgage term than before, therefore saving cash in the long run.
You can also speak to your lender at any time about extending or reducing your mortgage term, perhaps if your personal circumstances have changed. The lender may need to carry out an affordability assessment before agreeing to change the term though.
Loan-to-value refers to how the size of your mortgage compares to the overall value of your property. It describes what proportion of the value of your house your mortgage covers.
Why overpaying might be the best solution
Most mortgages allow you to overpay by 10% every year without being hit with an early repayment charge. You can usually start and stop these overpayments as you please.
In lots of situations, overpaying actually has the same effect as shortening your term, and so helps to cut down the total amount of interest you pay. But crucially, this option gives you more flexibility. If your circumstances change, you can just stop overpaying.
In fact this is one of the most common mortgage mistakes people make. We spoke to our mortgage expert, Kala from online mortgage broker Habito, to understand why this might be a better option than going straight for a shorter term:
Finally, think about your age when making your decision
An important consideration for lenders will be your age as a borrower, not just when you first take out the mortgage, but also how old you'll be when you are coming to the end of that mortgage term.
Lenders are generally not huge fans of lending into retirement, so they may be wary about agreeing to a mortgage term which concludes when you are pushing 75, for example.