Should I pick a long-term or short-term mortgage? - Mortgages - Guides |

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Should I pick a long-term or short-term mortgage?

Category: Mortgages
Author: Nigel Woollsey
Updated: 01/02/2019

When it comes to mortgages, the normal repayment period of 25 years sounds pretty long term – especially if you are in the first flush of youth. But a rising number of people are choosing to take out repayment periods of 30 or even 40 years. Why? And if they're doing it, should you be doing it too?
Let's look at the pros and cons of opting for something other than the usual 25-year repayment option.

At a glance:

  • Although 25 years tends to be the standard term for a mortgage, it's perfectly possible to negotiate with your lender for a longer or shorter repayment period.
  • A short-term repayment mortgage will get your debt paid off faster but will mean higher monthly repayments. For interest only loans the repayment is the same whatever length, but needs additional sums put aside for a repayment vehicle for shorter term mortgages.
  • Long-term repayment mortgages can be taken out over 30+ years. The advantage is lower monthly repayments, but you will pay more interest in total over the lifetime of the mortgage.

What are long and short-term mortgages?

A typical mortgage is often the largest financial commitment that anyone makes in their life. Forget personal loans for that smart new car you've had your eye on for a couple of weeks – mortgages are concerned with serious sums of money that will take more than two years to pay off with no security.

Big money often means that you'll be paying hundreds of pounds to your mortgage lender every month for the next two and a half decades – a house is not something you can think about popping on the credit card.

So, in the mortgage world, the phrases 'short term' and 'long term' are relative. Typically, any repayment term of 15 years or less is considered a short-term mortgage, while 30 years or more is long-term. Some lenders will now consider terms of up to 40 years for you to repay your home loan – but why would anyone opt for this, or on the other hand, choose a much faster payment schedule?

The advantages of a short-term mortgage: debt free sooner

Possibly the most important consideration in any mortgage is affordability. Mortgage lenders have absolutely no desire to see anyone overstretch themselves when it comes to borrowing more than they can afford: the golden rule is always 'be realistic about your budget'. Often first-time buyers start a mortgage with around 5% to 10% of the purchase price as a deposit and usually as a result look for 25 years or now longer to help make the monthly payments affordable.

However, if you have the luxury of a larger deposit, you might choose a repayment period that sees you mortgage-free in less time.

Paying it off sooner also means that your equity in your home (i.e. how much of your home you own) will rise faster too.

Top Tip

"The decision to take a shorter term on your mortgage depends on your monthly budget. A shorter-term mortgage increases your monthly mortgage payments but lowers the total amount of mortgage interest you will pay."

The disadvantages of shorter-term mortgage: greater repayments

Naturally, the shorter the term you borrow for, the higher you can expect your monthly repayments to be.

While we all aim to be mortgage-free as soon as possible, the higher your repayment the greater the risk that you might be overstretching yourself. A short-term mortgage is no good if you can't afford the monthly repayments that come with it. Here again, being realistic about what is a major financial commitment is paramount. If you can't comfortably afford the higher regular repayments of a short-term mortgage, you'll be very hard pressed to find a mortgage provider that is willing to lend you the money.

The advantages of a longer-term mortgage: lower repayments

Houses do not come cheap. A home or other property is a significant financial investment with a price tag that will at least be in the tens, and more likely, hundreds of thousands of pounds. Even modest houses command a significant outlay, with larger homes in more sought-after locations being able to breach the million-pound mark or more.

Higher house prices compared to growth in average salaries has seen many potential house buyers looking for mortgages at 95% loan-to-value (LTV) and even 100% LTV.
As a result, many borrowers now face a higher mortgage loan than previous generations and hence taking out a mortgage over a longer period is very sensible. Spreading the cost over 30 years or 40 years is becoming more popular and the resulting lower monthly repayments can make purchasing a house more affordable.

The disadvantages of long-term mortgages: More expensive over the mortgage term

While long-term mortgages can lower your monthly payments, it does mean that you will end up paying more back than with a more usual 25-year repayment plan. This is due to the extra interest to be paid on the additional years of the loan. In essence, the longer you take to pay, the more the mortgage lender stands to make in profit for lending you the money. For some people, of course, this is an acceptable trade-off – especially for younger people looking to get their foot on the first rung of the property ladder.

Interestingly, mortgage lenders are now much happier about lending to people where the mortgage term takes them past retirement age. In the past, trying to obtain a mortgage in excess of 65 was hard to find and only offered by a handful of mortgage providers. However, happily lenders are now much more flexible about the eligibility of older applicants, with many accepting mortgage applications with an age ceiling of 80, providing they are comfortable that the borrower can prove a regular income and meet their affordability requirements.

You can look for 30- or 40-year mortgages using our mortgage search tool.

Short-term or long-term mortgage: which is best for you?

As discussed above, both short-term and longer-term mortgages have their benefits and drawbacks. Like so many things, the answer to which suits you best is a question of balance: how much you can comfortably afford to repay per month vs. the length of time you are prepared to repay the loan over.

Affordability should always be your watchword: losing your home because you cannot keep up the mortgage repayments is something that neither you nor your mortgage lender wants. As such the decision on the length of your mortgage period should be one that both you and the lender are happy is realistic and affordable.

Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.