What is the best mortgage term for you?
In the UK, 25 years is the average length of a mortgage and the term that most people associate with a mortgage when they first take one out. However, depending on circumstances, some people may choose to pay their mortgage back over a shorter or longer period of time. Loan.co.uk takes a look at what options are out there.
As the average homebuyer is aged in their mid-30s, it is easy to see how a 25 year mortgage term makes sense as paying back over this period allows the mortgage to be paid off before retirement. It is very important to remember, however, that you can choose a different term for the mortgage if you wish to.
If your objective is to pay as little interest as possible you will want to pay the mortgage back over as short a period of time as possible. By shortening the mortgage term you will reduce the interest you pay back but your monthly payments will be higher. If this is your objective remember to ensure that you can afford the monthly payments comfortably over the shorter term you have chosen. Being able to afford your monthly payments now and over the full term you have chosen is a very important consideration in your decision.
If your objective is to keep your monthly payments as low as possible you can achieve this by choosing a longer term with your lender. While this means you will be paying out less per month, it does mean you will pay more interest over the term of your mortgage. Remember also that you will have to pay the monthly payment on your mortgage for the full term and if this takes you into your retirement, ensure you have a plan as to how you will make the payments once you are retired. Many lenders will now allow terms of 30 years or more to help people find payments that fit within their monthly budget.
To explore the impact term can have on the total interest you pay lets look at an example. Someone who has taken out a £150,000 mortgage at four per cent over 25 years will pay £87,526 in interest. If they decide to extend the mortgage rate to 30 years, interest will rise to £107,804, while a 35 year mortgage will lead to £128,948 of interest. As you can see you will always pay back a lot of interest on a mortgage because you are generally borrowing the money over a long period of time but this shows that the interest can vary significantly depending on the term you choose.
It is possible to have a mortgage that allows you to make overpayments, which can give you some flexibility. With this type of mortgage you may start with a longer term to keep your monthly payment lower but the mortgage product allows you to make extra payments on top of the agreed contractual monthly payment. The extra payments are therefore optional but when you make them they reduce the amount outstanding on the mortgage and therefore the amount of interest and the time you have the loan is reduced from the original term. This type of mortgage means that you don’t over commit yourself on monthly payments on your contracted rate but you still have the ability to pay more when you feel you can.
Whilst not all mortgage products have a complete flexibility in how much extra you pay on top of your contractual monthly payment (fixed, tracker, discount), most products will allow people to pay a little bit extra each year without any penalties – about 10 per cent is average. This can help cut down on the interest that needs to be paid on the mortgage, as well as potentially even the length of the mortgage itself. If you have not specifically chosen a flexible mortgage, before you pay anything extra in, check with your provider how much extra you can pay without inducing a charge.
So in summary, the most important thing when taking out any mortgage or loan of any type is to ensure that you can afford the monthly repayments now and in the future. While 25 years is the most common term chosen for mortgages it is important to remember that you can choose whatever term you feel comfortable with. Whilst not always the case, the objective for most people is generally to pay the debt off as early as possible without putting yourself under undue financial pressure.