It’s easy to be overwhelmed by the sheer number of mortgage products available. The trend towards offering non-traditional mortgage terms doesn’t help when you’re trying to decide which loan is best. Banks and building societies are increasingly offering longer-term mortgages lasting 30 or 40 years alongside the ‘standard’ 25-year term with which many of us are familiar. Shorter-term mortgages of 15 years or so are also available. So what are the pros and cons of short-term and long-term mortgages, and which might be better for you?
A mortgage is likely to be the biggest financial commitment of your life, so you need to make sure you’ve considered all the potential problems and issues that might arise. The higher monthly repayments on a shorter-term mortgage do expose you to a greater risk of default, but there are also many advantages to be enjoyed.
Choosing a shorter-term mortgage of 15 years or less means you pay off the loan much quicker than many people do. You must, however, consider the cost to you, not only in direct financial terms but also in the quality of your life and the potential stresses of repaying higher amounts.
Why choose a short-term mortgage?
Short-term mortgages have higher monthly repayments, but you’ll pay considerably less interest overall. If you’re able to put down a large deposit, you don’t need to borrow as much money, which is just one instance where short-term mortgages might be a good idea.
An additional advantage is that, if you’ve been able to repay your mortgage sooner than later, the equity in your property will also grow faster. The initial consideration if you’re thinking about a short-term mortgage, however, is whether you can keep up repayments over this period.
Can you afford a short-term mortgage?
Your monthly budget will dictate whether it’s possible to repay your mortgage over a shorter period of time than the standard term, but you need to be very careful not to overstretch yourself financially.
Also bear in mind the potential interest rate rises in the future, particularly considering the low rates we’ve enjoyed for more than a decade. In other words, the only direction interest rates are likely to go is up.
Responsible lending practices for mortgages
Mortgage lending practices have been strictly controlled since the global financial crisis of 2007, and your ability to repay should be carefully scrutinised by each lender. They’ll look at your regular outgoings and are unlikely to grant your application if they feel you’re a risk of default.
If you’re tempted by a shorter-term mortgage and earn the income to afford the repayments, it might also be worthwhile considering mortgage payment protection insurance (MPPI) to cover your repayments for a fixed time if you fall ill or lose your job.
Are there any alternatives to a short-term mortgage?
Instead of making high payments to your mortgage every month, it may be worthwhile looking into mortgage products that allow you to make overpayments as and when you can afford it. It takes off the pressure of having to consistently meet high repayments, and allows a little flexibility that can take years off your overall mortgage term.
So although 25 years has long been the ‘standard’ term for a mortgage, what attracts borrowers to extended repayment terms of 30 or 40 years, and is it worth considering a longer-term mortgage?
Taking out a mortgage of 35 or 40 years can seem like a huge financial commitment at any age, but the mortgage market has changed over the last decade. The stricter lending practices we mentioned earlier apply equally to long-term mortgage loans, and their suitability for each applicant must be carefully evaluated by lenders.
Why choose a long-term mortgage?
You might choose a long-term mortgage to benefit from lower monthly payments. Perhaps you’re more at ease knowing you can comfortably afford the repayments on your biggest asset, and feel it’s worthwhile despite the extra interest you’ll pay over the course of the loan term. It’s also beneficial if you need a high loan-to-value (LTV) mortgage.
Another consideration with long-term mortgages is your age. Although long-term mortgages are becoming more mainstream, some lenders still don’t offer this type of mortgage term if it means it will take the borrower into their retirement years.
On the other hand, younger applicants looking for their first property might have no problem in obtaining a mortgage with a duration of upwards of 35 years. So what are the main benefits and drawbacks of lengthier mortgages?
Pros of a long-term mortgage
- Monthly repayments are lower.
- Interest rate rises will have less impact.
- You may be able to secure a higher loan-to-value ratio.
Cons of a long-term mortgage
- It takes longer to repay.
- You pay more interest overall.
- You may be refused on age grounds.
Affordability is the keyword when thinking about mortgages . Hopefully between you and your lender, you’ll be able to find the right length of mortgage term and feel able to repay every month without too much difficulty.
By Ann Haldon