What is a mortgage term and how do I choose the right one?
There is no right and wrong answer. Picking a mortgage length depends on your individual circumstances such as your age and your budget.
To help you decide what length term is best for you, we talk to Lea Karasavvas, managing director of London-based mortgage broker Prolific Mortgage Finance.
What is a mortgage term and what happens when a mortgage term ends?
A mortgage term is the duration between drawdown of funds from the bank you are borrowing from and the expiry date of those terms when the mortgage has to be repaid back to the lender. At the end of the term the loan that was borrowed must be paid back to the lender, or if this is a repayment mortgage, the debt would have been paid back in full by this point.
What is the average mortgage term?
The average term for a mortgage is still 25 years, although there is no longer a rationale behind this.
Originally 25 years was recommended as this was the maximum term that financials advisers could earn commissions on, but this has not been the case for many years.
As affordability is now a much bigger issue for many given increasing house prices, and also the fact that interest only is now only available up to 85% loan-to-value with the majority of lenders, more and more people have been taking mortgage terms of 30 years or even 35 years. In some instances, if the applicants are young enough some lenders allow them to take a mortgage term of 40 years, but this is not available through all lenders.
What is the shortest term you can get? And what is the longest term?
The shortest term of a mortgage in the mainstream market tends to be 5 years. While there are shorter terms available, these are normally for specialist mortgages such as bridging finance which can be as short as 6 months, but these are normally used for developers, or investors. The longest term of a mortgage available on the high street for residential terms tends to be around 40 years, however the number of lenders offering terms of this length are minimal.
Am I better off getting a longer or shorter mortgage term?
If affordability is not an issue and if budget allows, a shorter term mortgage is much better value than a longer term mortgage. The reason here is simple. The longer you have a mortgage term for, the more interest that will be payable to the bank for the borrowing, therefore the more the mortgage will ultimately cost. In the early years of a mortgage term you will see the amount that would be cleared off a debt would be significantly higher for a mortgage term of 15 years for example, when compared to a mortgage over 40 years. This is primarily due to the interest being heavily front loaded.
Can I extend or reduce my mortgage term? Will this cost me anything?
If you wish to reduce your mortgage term this can be done in most instances by simply calling your lender and requesting the reduction. However, be sure you can afford the monthly payment before committing to it. If you are considering reducing the term, we would advise that you may be better off making the lump sums manually before committing to the reduction simply because this gives you more control. The cost of reducing the term is nominal, but I would suggest ensuring you are happy with the monthly costs before committing to do so.
Do lenders allow older borrowers to change their mortgage term? Is there an age limit?
For mortgage terms, the length of term will differ from lender to lender. Some lenders expect the mortgage to be repaid by age 65, some at age 70 and some even at age 75. There is plenty of choice regarding the mortgage term so those who are older should not to think they are out of options. If your current bank requires your mortgage to be repaid at age 70, there could still be many lenders that will allow the term to go to age 75. Some lenders will even go beyond 75 if there is a suitable income proof beyond the retirement age.
What happens if I want to remortgage? Do I have to choose a new term?
It is entirely up to you but we recommend when remortgaging that you keep it to the same term. The rationale here is simply because if you keep putting the mortgage back to 25 years then you will ultimately end up paying more interest. When remortgaging, by keeping the term in line with the original term taken when you first started the mortgage, you will ultimately ensure the debt is cleared.