A Guide to Mortgage Terms

When choosing which mortgage to go for one of the questions you’ll need to answer is how long you want your mortgage term to be. A shorter term means paying off the loan more quickly but a longer term means lower monthly payments.

Here at VA Mortgages it is our mission to help you find the best mortgage for your personal circumstances. To help you out, we’ve compiled this guide: All you need to know about mortgage terms.

What is a Mortgage Term?

A mortgage term is the entire lifespan on your mortgage. The term is the mortgage duration during which you will be required to make monthly payments to your mortgage lender.

Lenders offer mortgages on a variety of mortgage lengths, but the standard mortgage term in the UK is 25 years.

Mortgage Terms for Repayment Mortgages

If you have a repayment mortgage then the mortgage term is the length of time it will take to pay off the amount you have borrowed plus interest and fees.

Over the term of the mortgage as long as you continue to pay your monthly repayments then the balance on your mortgage will get smaller until at end of the term you will have paid the mortgage off.

Mortgage Terms for Interest-Only Mortgages

If you have an interest-only mortgage then the term is the period of time the lender will grant the mortgage loan. The mortgage debt will remain constant providing the monthly interest payments are made.

The mortgage debt will still need to be paid off. This can be achieved by selling the property or using other savings or investments to clear the balance.

What is the Difference between a Mortgage Deal and a Mortgage Term?

The mortgage term is distinct from a mortgage deal (also known as a mortgage benefit period). A mortgage deal is a product you sign up for to cover a set period of your mortgage term.

For example a five year fixed-rate mortgage deal will tie you to an agreed interest rate for five years of your 25 year mortgage term, after which you will still have twenty years of your mortgage term left to run.

When your mortgage deal ends you will usually be moved onto the lender’s Standard Variable Rate (SVR) which is usually less favourable than mortgage deals such as fixed-term or discounted rates.

It’s a good idea to speak to a mortgage advisor when your mortgage deal is coming to an end to secure another favourable deal.

What Mortgage Terms are Available?

Each lender has their own rules when it comes to mortgage terms. Some lenders will have no minimum term, while others will only lend for a minimum of fifteen years.

Most lenders these days will stretch to a 35-year term and some might even offer 40-year terms.

Your age might affect which mortgage duration you choose. If you are a first-time buyer you might decide to opt for a longer term of more than 25 years in order to reduce the monthly repayments and improve affordability.

If you are an older borrower you might choose a short term mortgage deal to ensure that you pay the mortgage off before you retire. Find out more about mortgages for older borrowers in our guide to mortgages for the over 50s.

Choose a mortgage advisor who can look at the whole of market to ensure they can help you to secure the right mortgage term for your circumstances.

Minimum Mortgage Terms

Short term mortgages can range from six months to ten years in length. The term of the mortgage however cannot be shorter than the mortgage deal or benefit period. This means that you cannot get a ten-year fixed rate deal for a mortgage with a five year term.

There are a number of reasons why you might choose a short term mortgage. A short term mortgage means making higher monthly payments but it also means paying the whole mortgage off more quickly.

Mortgages with terms of 3 years or less will be defined as a bridging loan. This normally incurs a higher interest rate (to reflect the risk). Bridging loans often use interest roll-up in which interest is not serviced monthly but paid at the end of the term.

For some people a short term mortgage is a good way of owning a property outright more quickly. You may not have enough capital to buy the house outright but you do have enough to make large monthly payments to repay the debt over a shorter mortgage term.

Other people might need a short term mortgage to enable them to buy a new property when their current home has yet to sell. This sort of arrangement requires the new short term mortgage to be a second mortgage.

Age can also be a factor in choosing a short term mortgage. If you are elderly or retired it might be harder to secure a longer mortgage term and so a short term mortgage could be more suitable.

Pros of Choosing a Short Term Mortgage

  • The quicker you pay off the mortgage, the quicker you will own your home outright.
  • By paying off the mortgage more quickly you will pay less in interest than for a longer term mortgage.

Cons of Choosing a Short Term Mortgage

  • Monthly payments are higher.

Maximum Mortgage Terms

A longer mortgage term is a big commitment as it will take far longer to pay off. The mortgage duration for a long term mortgage can be 30, 35 or even 40 years.

People generally choose a longer term mortgage of over 25 years as a way to lower the monthly repayments and make it more affordable. However because you will be paying interest on the debt for longer, you will end up paying more in total than if you chose a shorter mortgage term.

Pros of Choosing a Long Term Mortgage

  • Monthly mortgage payments are lower.
  • The affordability of the mortgage might be improved. This could mean a lender is more likely to grant you a mortgage if they think you can afford the monthly costs.

Cons of Choosing a Long Term Mortgage

  • You will pay more interest overall.
  • It will take you a long time to pay off the mortgage so you will be in debt for longer.
  • On average it now takes longer for people to get on the property ladder so your mortgage term might take you past retirement age.

What is the Average Mortgage Term?

The typical duration of a mortgage in the UK is 25 years but increasingly first-time buyers are opting for longer mortgage terms of up to 40 years.

Mortgage terms of up to 40 years can mean that you will have to continue to pay the mortgage even once you have retired as it will take longer to pay off the debt.

What Happens at the End of Mortgage Term?

If you have a repayment mortgage then usually a couple of weeks before the final payment is due to be made you will receive a letter from your lender. This usually contains a final redemption statement outlining the final amount to be paid off.

Once your final payment has been made crack out the champagne and celebrate! It is a huge achievement and a great relief to finally own your own home outright.

Do remember to cancel the direct debit covering your monthly payments, but only after the final payment has been taken!

If you have an interest only mortgage then at the end of the term all your interest will have been paid off but you will still need to clear the capital debt. This can be done by remortgaging, selling the property or using savings or investments.

Changing your Mortgage Term

Having taken out a 25 year mortgage, some borrowers ask if they can shorten or lengthen the term of their mortgage. The short answer is yes.

Extending the mortgage term is one way of reducing monthly payments. To extend the term of the mortgage you will generally have to apply to your lender to extend the term. They will then assess if they think you will be able to continue making mortgage payments for the entirety of the new term.

For example if you are due to retire not long into the extended term of the mortgage the lender might require proof that you will be able to afford to continue to pay the monthly repayments.

Some borrowers might wish to reduce the term of their mortgage by remortgaging. If you are earning more, or have come into an inheritance you might now be able to afford to make higher monthly repayments and reduce the term on your mortgage.

Another way of effectively reducing the mortgage term is to overpay on your mortgage. You can find out more about overpaying in our article ‘Is it Worth Overpaying on my Mortgage?’.

A mortgage advisor can help you to explore whether shortening or extending your mortgage term might be right for you.

How Long Should My Mortgage Term Be?

The length of your mortgage term depends on your own personal circumstances. Factors which might affect the duration of mortgage you choose might include: your age, your budget and the affordability of the mortgage.

A shorter mortgage term does work out cheaper overall as you will pay fewer monthly interest payments. Plus you will own your home more quickly.

However for first-time buyers a longer mortgage term can make the mortgage more affordable because the monthly repayments will be lower.

Talk to an advisor

VA Mortgages are an independent whole of market mortgage advisor. Contact our advisors today for a no obligation discussion about your circumstances.

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