What is a mortgage term and which one is right for you?

What is a mortgage term and which one is right for you?

IF you’re lucky enough to be in a position to buy your first new home, signing yourself up for a mortgage might seem a little daunting.

With plenty of options to choose from – including what your mortgage term will be – it can get confusing.

To help you break down the jargon, we explain what a mortgage term is and how to find the right one for you.

What is a mortgage term?

A mortgage term is the amount of time it takes to pay off your loan.

You can choose to take out a shorter mortgage term or a longer term mortgage term.

A short-term mortgage is usually considered to be 20 years or less, while a term of 30-years is classed as a longer term.

One of the most common mortgage terms is a 25-year mortgage, but you could pick one for as much as 40 years.

If you pick a shorter mortgate term, your monthly repayments will be more – but, you'll ultimately pay less in the long-run as your interest will be less.

Go for a longer-term mortgage, and your monthly repayments won't be as much – but ultimately, you'll pay back more in interest.

If you took out a mortgage term of 35 years, that would mean you have until 2056 to pay it all off.

How do I pick the best term for me?

Picking the best mortgage term for you requires research.

Typically, your mortgage term should be as short as possible so you can save money on interest repayments.

But it shouldn't be too short where you're struggling to meet the repayments.

That means that you need to take into account what your personal circumstances and finances are before you commit to a term.

However, here are some tips from experts that different types of buyers might want to follow below:

First-time buyers

Soaring house prices over the course of this year has meant more first time buyers have opted for longer mortgage lengths, Habito mortgage expert Alex Winn said.

It's meant that more expensive homes has pushed up the amount buyers need to pay back per month – and has made repayments more unaffordable.

"This is particularly true for first time buyers who typically have smaller deposits – 5% to 20% of of the value of the home," she said. 

Picking a longer-term mortgage will therefore most likely be the only way many first time buyers – or those with small deposits – can get a mortgage, Quilter mortgage expert Charlotte Nixon said.

But she adds you can still overpay your mortgage to drive down interest.

"Some mortgages offer flexibility and allow you to make over-payments, which will have the effect of reducing your term and the amount of interest you pay overall," she said.

However, be aware that you might be charged a fee for paying your mortgage off early.

This could be between 1% and 5% of the outstanding mortgage balance, according to MoneySuperMarket.

However, most mortgage deals allow you ro repay 10% of your loan back every year penalty free.

You can use the price comparison website's mortgage overpayment calculator to see what your fee could be.

Buyers with poor credit scores

Mortgage platform Dashly.com head of intermediaries Iain Swatton said those with lower credit scores should consider any other monthly repayments – like paying off other debts – while deciding their mortgage term.

This is because you shouldn't over commit to steep monthly repayments in a bid to lower your interest repayments and end up being in a position where you can't pay it off.

"Spreading payments means you'll pay more interest on your mortgage overall, so it's crucial to balance this against monthly affordability, and to budget effectively," he said.

Buyers on lower incomes

If you're on a lower income, you'll want to make sure that you can afford the monthly mortgage repayments you've signed up to.

If you're struggling to make your cash last, then it's a good idea to go for a longer mortgage term so you're not weighed down by higher monthly repayments, Saffron Building Society chief commercial officer John Penberthy-Smith said.

"For affordability it’s often right to extend the term and reduce the payments, particularly if your on a low income," he said.

"You may pay more in interest but that is balanced against the benefits of buying versus renting. This can also work for people with smaller deposits."

Can I change my mortgage term?

If you think you've signed up to a longer mortgage term than you would like and you're looking to change this, it is possible.

You can remortgage your deal in the future, switching to a shorter term and lower rate as the amount of equity you hold in the property increases.

It's best to use a price comparison site like Uswitch, for example, to find the best deal.

L&C Mortgages director David Hollingworth said it "makes sense" for homeowners to keep reviewing their term as their circumstances change.

"When shopping around for a new deal it’s easy to reconsider the term as well," he said.

"Alternatively most deals will allow overpayments to be made, typically up to 10% per annum, without charging an early repayment charge. 

"This will help to eat into the mortgage more quickly and cut the interest bill as a result."

Here's how to get a mortgage if you’ve got a poor credit score.

Read our guide to the best mortgage calculators so you can work out how much you can borrow.

New 5% deposit mortgages have been launched by leading banks including Natwest and Barclays as part of the Government's 95% mortgage scheme.

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