Like most people, your home may be the largest purchase you’ll make in your lifetime so choosing the right length of time for your mortgage is determinant.  

Recent studies have shown that more than half of mortgages can now be taken out for a 40-year term. As the cost of buying a property continues to exceed the budgets of many homebuyers, the prospect of paying less even at the price of a (way) longer mortgage, has emerged in order to get on the property ladder.

It’s important to be fully aware of what you are committing to when choosing the length of your mortgage. To help you decide the right term, let’s look at the offers available and their pros and cons.

Long-term mortgage: Smaller monthly repayments but larger bill overall

A term of 30 years or more would be a long-term mortgage with the standard term length being 25 years.

Pros

Low monthly payments that are likely to be affordable and easy to manage. Besides, rate rises have less effect.

Cons

Although your mortgage may seem cheaper when spread across several years, it’s likely to be more expensive overall because you are charged more interest over a longer-term.

Short-term mortgage: Higher monthly repayments but cheaper overall

A term of less than 20 years would be a short-term mortgage.

Pros    

You will pay the balance off quicker, and you will own your home and become debt-free sooner by paying less in total because less interest is charged.

Cons

Shorter-term mortgages cost more each month and rate rises have more effect. If your income is modest or your deposit small, it’ll be difficult to secure a short-term mortgage.

Case study

For instance, paying off a £185,000 mortgage with an interest rate of 4% would cost:

Mortgage term          Monthly payment               Overall cost

25 years                                £976                                 £292,949

15 years                              £1,368                              £246,316

Would overpaying be the best solution?

Some mortgages let you make overpayments, which means that you can pay more than the amount due each month or paying off a lump sum using spare savings available for example. In sum, making overpayments has the same effect as shortening the mortgage’s term.

Finally, always check with your provider first as you may have to pay a fee to do this. If overpayments are allowed, tell your lender that you want your overpayments to go towards paying off the overall balance, not just the interest.

For more advice on mortgages or to speak to an advisor you can contact GPD Mortgage Solutions today!