Mortgage news

How to choose your mortgage term


One of the common mortgage questions we get asked from anyone buying a property is how long should my term be? And while some mortgage brokers may give you a term suggestion based on when you’d ideally like to be mortgage-free, we’ll always explore the best term for you by asking ‘what’s your budget’. Here’s why.

What is a mortgage term?

A mortgage term is the number of years it will take to repay your mortgage in full. As a standard, most homeowners start by looking at a 25-year mortgage. Usually, this ensures that they’re mortgage-free before they reach retirement age and gives a good base for understanding the anticipated costs of the required mortgage.

Some lenders stipulate in their terms and conditions that they won’t allow homeowners to borrow for a term that takes them passed their anticipated retirement age. This is mainly because retirement income is likely to be less than working income, so affordability decreases.  

However, with the age of retirement creeping up, there’s more flexibility for borrowers to take out longer mortgage terms if they want to. Most lenders will offer 30 and 35-year terms, and some will offer up to 40-year terms, such as HSBC and Nationwide.  

How does a mortgage term affect mortgage payments

The longer your mortgage term, the less your monthly payments will be, however you’ll pay more interest. This is why we’ll always begin the discussion with a potential home buyer about what their monthly budget currently is and what their comfortable upper limit would be. We’d never want to stretch anyone beyond their means, so knowing what an individual can contentedly afford is crucial when choosing a mortgage term.

As an example, here’s how much an individual would expect to pay monthly on different mortgage terms for a borrowed amount of £180,000 at a 6% interest rate:

  • 25-year term: £1160
  • 30-year term: £1080
  • 40-year term: £990

Between the shortest and the longest term possible, there’s a £170 difference in monthly cost. In the current climate especially, this £170 is the opportunity to ensure there’s a buffer of disposable income which can make all the difference to a household.

However, it’s worth noting that while there’s a saving of £170 per month, opting for a 40-year mortgage has almost doubled your mortgage term compared to choosing a 25-year term. This means interest paid in the long run will be far higher and a buyer will have the debt of a mortgage for many more years.

It’s certainly worth investigating with your mortgage broker if the saving is worth pursuing for such a long term. For some people, it will be. For others, there may be room in the budget by cutting unnecessary spend, like subscriptions, to tie into a shorter term.

Should certain buyers tie into certain term lengths?

There’s no one-size-fits-all choice of term for different homebuyers. Whatever you choose will be personal to your financial circumstance.

However, what we would recommend is that first-time buyers give themselves a little more room within their budget per month, simply to get used to the additional finances that come with owning a house. Over half of first-time buyers are more likely to tie into a 30-year term, compared to only a quarter a decade ago.

Is it better to overpay or reduce the term?

Some lenders will allow you to change your term, however this will involve going through another affordability check which can be time consuming. Instead, many homeowners will instead choose to overpay on their mortgages to help reduce their terms.

Following the example above, you may have tied into a 40-year mortgage term but, if your lender has the option to overpay, there’s nothing stopping you paying £1160 per month in a bid to reduce your overall term to 25 years.

The best thing about overpayments is that they’re flexible. If a homeowner chooses to reduce their term to 25 years from 40, then they must pay £1160 per month (following the example above) without fail. However, overpayments are optional. As long as you pay the minimum of the £990, you can choose whether you then overpay that month.

This option can be great seasonally. A homeowner may decide that in the run up to Christmas, they pay their minimum mortgage repayment cost. However, in those months where there’s a little more disposable income available, they can overpay.

The only thing to note about overpayments is that lenders usually have a limit on how much you can overpay by. This is commonly 10% of the outstanding balance for the year.

I’m a landlord, what about me?

The situation for landlords is slightly different. For most landlords, the decision is made to choose an interest only repayment structure and with this, the overall term doesn’t impact the interest only monthly payment. Our advice would commonly be to borrow for the maximum term offered by the lender.

Choosing your mortgage term is a personal decision which depends greatly on your financial circumstances when buying a home. With the help of a mortgage adviser, you can work through your budget and find the best option for you to ensure you’re within a comfortable repayment structure that doesn’t threaten your financial wellbeing.