Long-term and short-term mortgages – how do they compare?

When you take out a mortgage, one of the biggest decisions you have to make is how long you want the mortgage term to be. A standard mortgage term has historically been considered 25 years, although this figure is creeping up due to the increasing disparity between incomes and house prices. Because of this, many buyers struggle to make the repayments needed for a 25-year mortgage term.

A short-term mortgage tends to be 15 years or less, and a 30 year plus term is considered a long-term mortgage.

In this article, our expert team of independent mortgage advisers at Southampton PIL considers the pros and cons of short-term and long-term mortgages, to help you decide what length of mortgage term will be right for you.

What is a mortgage term?

Your mortgage term is the length of time you agree to repay your mortgage debt over. You choose it when you apply for your mortgage and, depending on the terms and conditions of your particular mortgage product, you may be able to extend or shorten the length of your mortgage during its term. 

What are the minimum and maximum term lengths?

The minimum term that you can take a mortgage out for is usually two to five years, however you may be able to get a mortgage for as little as six months.

The maximum term for a mortgage is generally 40 years; keep in mind that most lenders will have a maximum age limit for the end of the mortgage term, which means that you will usually have to pay it off before you are 80-85 years old.

What mortgage term is best?

There is no ‘best’ option as, of course, every individual’s circumstances are different. 

It’s a balance between day-to-day affordability and not over-stretching yourself in your efforts to minimise the amount of interest you’ll be paying overall.

Here is an example of the impact the length of a mortgage term has on your monthly repayments and the overall interest you pay over the whole mortgage term:

You borrow £300,000 with a 3% interest rate.

15-year mortgage term = £1,073.95 repayment per month and £72,914.09 interest over 15 years

40-year mortgage term = £2,071.74 repayment per month and £215,497.57 interest over 40 years

For both examples the interest payable each month would be £750pm. 

When you are comparing interest rates across short-term and long-term mortgages, you need to take into account introductory initial rates. These can vary regarding the number of years they apply to, and whether they are fixed, stay below the lender’s variable rate or track something like the Bank of England base rate.

As well as budget considerations, lifestyle goals will play a part in your decision-making too. For example, if you would ideally like to be mortgage-free by the time you retire, you could plan the end of your mortgage term to coincide with your retirement age.

Experienced mortgage advisers like the team at Southampton PIL can talk you through the options available to you, to find the best option for your personal situation.

Long-term mortgages: advantages

Lower monthly payments

Because your mortgage is paid back over a longer time period – spreading your costs, the monthly repayments are lower than with a shorter mortgage term. This can be helpful if your monthly budget is limited and you need more disposable income at this time in your life.

Wider range of house buying options

Paying back your mortgage over a longer period means that you can apply for a larger mortgage, opening up a wider selection of properties for you to buy, both in terms of price and location.

Easier to pass affordability checks

As lenders stress test your ability to make your monthly mortgage repayments, the fact that you are making lower repayments means that it should increase the amount they are likely to lend you.

Not a fixed term

Although you are signing up to a long-term mortgage, your lender will probably be flexible about changing the length of your mortgage term at a future date, if your circumstances change. Also, many lenders will allow you to overpay to a certain level, so this could be useful if you can’t commit to higher payments every month but can reduce your mortgage when you do have the means to do so.

Long-term mortgages: disadvantages

More interest payments

A longer mortgage term equals more monthly repayments which means that you will have paid significantly more interest by the end of a longer mortgage term.

Age cap

If you are over 40 when you are applying for a 40-year mortgage, a lender could challenge your ability to repay your mortgage past retirement age. Generally speaking, mortgage lenders stipulate a maximum age of 85, or lower, for the date your mortgage needs to be repaid in full. As you are likely to be retiring before then, you will need to provide proof of how you are planning to keep making your repayments past retirement. This could be your forecast pension income, rental income from an investment property or other investments. 

Slower build-up of equity

The fact that you are paying your mortgage off more slowly means that you could be vulnerable to ending up in a negative equity situation if property values go down, or if you would like to move house.

Long-term commitment

Still paying off your mortgage in later life could impact on your retirement plans and other lifestyle options.

Short-term mortgages: advantages

Paying balance off quicker

The shorter your mortgage term is, the sooner you will be mortgage-free and the fewer monthly repayments you will be making. This means you will be paying less interest over the whole mortgage term.

Building equity and ownership more quickly

When you have a shorter-term mortgage, you are building equity more quickly and, ultimately, owning your home outright sooner than if you have a longer-term mortgage.

Older borrowers

As mortgage lenders generally have a maximum age they will lend to, shorter-term mortgages can be an attractive option for older people looking to remortgage or take out a new mortgage.

Flexibility

A short-term mortgage can be the ideal solution if you need to bridge the gap between selling one home and buying another, or if you are expecting to come into an inheritance or another significant lump sum within the not-too-distant future.

Property investment

Short-term mortgages can be a good option for landlords who are investing in property to rent it out.

Short-term mortgages: disadvantages

Higher monthly payments

The shorter your mortgage term, the higher your monthly repayments will be. This could put extra pressure on your day-to-day financial budgeting.

High interest rates

When interest rates are higher, it has more impact on shorter-term mortgages. 

Reduced disposable income

The higher your mortgage payments are, the less disposable income you will have to spend in another areas.

Limited borrowing potential

As a short-term mortgage means that your monthly repayments are significantly higher, this will potentially reduce the amount your mortgage provider is prepared to lend you, which will limit the choices of property you can afford to buy.

Limited loan amount availability

As the monthly repayments are higher with a shorter-term mortgage, the affordability criteria bar will be higher too. Lenders may reject your application if they feel the repayments will be too much of a stretch for you.

Not sure what length of mortgage to go for?

We have a mortgage calculator available which you can use to help find the best balance for you between affordable monthly repayments and not paying more interest than necessary.

How PIL Southampton can help you 

Our independent of team of mortgage advisers is ideally placed to handhold you through the whole mortgage application process. They will work with you to find the best option available to suit your financial circumstances and your lifestyle aspirations.

How you can contact PIL Southampton

You can email us, fill out the contact form on our website or call us on 02380 668407. We look forward to hearing from you.