What Is A Mortgage Term And How Do I Choose The Right One
There is no right and wrong answer. Picking a mortgage length depends on your individual circumstances such as your age and your budget.
To help you decide what length term is best for you, we talk to Lea Karasavvas, managing director of London-based mortgage broker Prolific Mortgage Finance.
What is a mortgage term and what happens when a mortgage term ends?
A mortgage term is the duration between drawdown of funds from the bank you are borrowing from and the expiry date of those terms when the mortgage has to be repaid back to the lender. At the end of the term the loan that was borrowed must be paid back to the lender, or if this is a repayment mortgage, the debt would have been paid back in full by this point.
What is the average mortgage term?
The average term for a mortgage is still 25 years, although there is no longer a rationale behind this.
Originally 25 years was recommended as this was the maximum term that financials advisers could earn commissions on, but this has not been the case for many years.
As affordability is now a much bigger issue for many given increasing house prices, and also the fact that interest only is now only available up to 85% loan-to-value with the majority of lenders, more and more people have been taking mortgage terms of 30 years or even 35 years. In some instances, if the applicants are young enough some lenders allow them to take a mortgage term of 40 years, but this is not available through all lenders.
More About Long Term Fixed Rate Mortgages
Technically, a long term fixed rate mortgage is any fixed rate mortgage that lasts for 5 years or more.
Once upon a time, these were less popular. 2-year fixed rate mortgages had incomparably better rates than their 5-year and 10-year siblings. But, times change. Nowadays, long term fixed rate mortgages actually make up the majority of the mortgage deals on the market.
Okay â so how long term is long term?
While 5 year fixes once seemed long term, you can now fix for 10, 15, and even up to 40 years.
With Habito One, you can fix your rate and monthly repayments for the entire term of your mortgage â right up until you finish paying it off. And this can last for anywhere from 10 to 40 years .
A long term fixed rate mortgage means that the interest rate you agree to today will still be yours long into the future, but this greater security means youâll be paying a bit more in interest now.
Which Is Better: A 25 Or 30
Again, the answer will depend on your personal circumstances and financial situation. To help you, its worth using a mortgage calculator to try different term lengths and find out how much it will cost you each month and over the entire term.
Choosing a 25-year term will be cheaper in the long run, but make sure you can afford the higher monthly payments. If a shorter term makes repayments too expensive, consider the longer 30-year term.
If interest rates go up later, your repayments will increase more if you have a shorter term, so make sure you consider rate rises when you budget for your mortgage.
As well as considering your budget, you might want to look ahead to when you would ideally like to be mortgage-free. For example, if you plan to retire in 25 years and want to be mortgage-free by then, you could choose a 25-year term if you can afford it.
Recommended Reading: What Credit Score Does Vanderbilt Mortgage Require
After Youve Accepted A Mortgage Offer
Typically, once youve accepted a mortgage offer, you can move onto the next stage: exchanging contracts. This is one of the last steps before setting a completion date and, in a matter of weeks, receiving the keys to your new home!
Before exchanging contracts, there are a few things left to do. This includes agreeing on fixtures and fittings, ensuring your solicitor has completed their paperwork, and ensuring a building survey has been done. Youll also need building insurance, which is essential when taking out a mortgage. Most importantly, youll need to have your finances ready to complete the transaction, including your mortgage offer and full deposit.
Once contracts are exchanged , theres no going back! It can take between 7 and 28 days to go from exchanging contracts to completion. However, some lenders do allow this to happen on the same day), and its only at the later stage that you can move in.
As you can see, receiving your mortgage offer is a significant step in the journey towards buying a house. But its also not the end of the road. As soon as you get your mortgage offer, the clock starts to tick towards its expiry. It helps to be as organised as possible and maintain good communication with your lender to ensure you dont miss any milestones or deadlines.
While the length of time a mortgage offer can vary between 3 and 6 months, this is usually more than enough time to complete your purchase and move into your new home.
Getting The Most Out Of Your Mortgage
Whether you choose to stay with your lender after the initial rate is up or remortgage with someone else, having an understanding between initial rates and full-length terms will help you make better decisions with more transparency. And that transparency is one of the most vital factors for anyone borrowing a mortgage.
At Molo, we make mortgages easy and break down the complicated jargon often associated with the world of lending.
For more articles on understanding mortgages, check out the following:
You May Like: When Does Mortgage Refinance Make Sense
Mortgage Term Popularity Data
A 5-year mortgage term is the most popular duration. It sits right in the middle of available mortgage term lengths, between one and 10 years, and, thus, its popularity reflects a risk-neutral average. It also tends to be heavily promoted by major lenders. A further breakdown of mortgage terms shows that about 80% of mortgages have terms of five years or less.
Below are the most recent data on amortization periods of Canadian mortgages.
What Is The Longest Mortgage
In the United States, the standard mortgage term is 30 years, although many mortgages are set at 15 years. The high cost of homeownership, however, has discouraged many people from buying or entering the market. To lower monthly payments, longer term mortgages have been introduced in Europe and in Japan where, in 1995, 100-year mortgages were first made available. Although these loan terms remain quite rare in the United States, the longer term mortgage may be coming to a real-estate market near you.
Recommended Reading: Can I Sell A Home With A Mortgage
The Average Mortgage Length In The Us
When deciding between certain products, it can be easy to just go with the most popular. But when it comes to choosing the right mortgage product to fit your goals, going with the most popular option may not be the best decision.
The average mortgage length is a good place to start. Learning more about other term length options and the benefits and drawbacks of each one will help you find the right mortgage for you.
Can I Shorten An Extended Mortgage Once Ive Taken It Out
Another option is to take out an extended mortgage initially, only to shorten it later on by remortgaging. In many ways this can be seen as an attractive option. Your personal circumstances may improve over time you may start to earn more, you may inherit money, and the same may apply to your partner. This could enable you to afford higher monthly repayments.
Based on this scenario, you could initially purchase a home by taking out an extended mortgage, and then look to shorten the terms of that mortgage at your earliest opportunity, by remortgaging to a shorter term. Talk to your mortgage broker about this strategy.
Let us match you to your perfect mortgage adviser
You May Like: How Much Will I Be Loaned For A Mortgage
Longer Term Means More Interest
To explore the impact length of term can have on the total interest you pay, lets look at an example. Someone who has taken out a £150,000 mortgage at four per cent over 25 years will pay £87,526 in interest. If they decide to extend the mortgage term to 30 years, the amount of interest you pay will rise to £107,804, whilst a 35-year mortgage will lead to a total of £128,948 in interest. As you can see, youll always pay back a lot of interest on a mortgage because youre generally borrowing the money over a long period of time. But, our examples show that the interest can vary significantly depending on the term you choose.
Consider Your Financial Goals
Letâs face it: a lot can happen throughout your current mortgage term. Your financial goals at the beginning of your current mortgage term may no longer match up with your goals today. You could have received a substantial raise at work, lost some income or even retired. You may have had a baby, or need to pay for your childâs university tuition. If thereâs any chance youâll need to move in the next 5 years, that should be factored into your decision. Or, if you think you want to access some equity, you should be mindful of that too. Whatever your needs are, make sure you consider them when choosing a mortgage rate, term and product.
Don’t Miss: What Is Private Mortgage Insurance
What Is The Length Of A Mortgage
When you apply for a mortgage you decide on how long is needed to pay it off. Longer mortgages have cheaper monthly repayments but cost more over the long term, as there is usually more interest attached to the loan.
If you took a mortgage in 2019 with a 25-year repayment plan, the entirety of the mortgage would be paid by 2044. Terms shorter than 20 years are considered short term and those longer than 30 years are referred to as long term.
What Is The Maximum Term On A Help To Buy Mortgage
The maximum term on a mortgage taken out through the Help to Buy scheme is 35 years. This was increased from 25 years when the government revised the scheme in 2019.
Onlinemortgageadvisor.co.uk is an information website all of our content is written by qualified advisors from the front line, for the sole purpose of offering great, relevant, and up-to-date information on all things mortgages.
Online Mortgage Advisor is a trading name of FIND A MORTGAGE ONLINE LTD, registered in England under number 08662127. We are an officially recognised Introducer Appointed Representative and can be found on the FCA financial services register, number 697688.
The Financial Conduct Authority does not regulate some forms of buy to let mortgage.
Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage.
We are an information-only website and aim to provide the best guides and tips but cant guarantee to be perfect, so do note you use the information at your own risk and we cant accept liability if things go wrong. Please email us at if you see anything that needs updating and we will do so ASAP.
*OMA Mortgage Approval Guarantee is subject to you providing satisfactory documentation. See T& Cs.
Maximise your chances of approval, whatever your situation – Find your perfect mortgage broker
Recommended Reading: Can Non Permanent Resident Get Mortgage
Should You Get A Longer
The most common mortgage term is 25 years. But high house prices mean more people are opting for longer-term mortgages – some lasting up to 40 years – as a way to get onto the property ladder.
Longer-term mortgages mean smaller monthly repayments, but its important to factor in that youll end up paying a lot more in interest overall. Plus, with a mortgage that lasts such a long time, you might not be able to retire as early as youd like.
- A home loan lasting more than the traditional 25 years is considered a longer-term mortgage
- With a longer-term mortgage of up to 40 years youll pay less monthly but will end up paying more in interest overall
- People over 30 may struggle to get a longer-term deal, as lenders typically set a cap on the maximum age you can be when your mortgage term ends
Choosing A Mortgage Term
Choosing the right mortgage length may seem difficult, but this decision will influence your long-term financial health. The options can seem overwhelming, especially if youre a first-time home buyer. Its important to pick one that meets your financial needs since youll likely have your mortgage for a significant period of time. Find out which mortgage term best fits your lifestyle and puts you on the right track towards homeownership.
Recommended Reading: How Far Can You Fall Behind On Your Mortgage
Once Youve Sent Your Application
From this stage, how long it can take to get a mortgage offer will largely depend on how your chosen lender operates and your personal circumstances. The review process usually takes between 2 and 6 weeks, based on the quality of information youve given.
The initial application will mean providing information like your household income, the amount you want to borrow, and how much deposit you can afford. These figures help mortgage providers make their initial assessment.
Your prospective mortgage provider also needs permission to carry out a credit check on your financial status and history. This is often done through a credit referencing agency. If youre shopping around different providers, be careful about letting too many companies run credit checks at once. Even if they are successful, this can affect your credit score.
If its a joint mortgage application, you both need to submit your details and go through the checks. A history of debt can be a potential stumbling block. However, lenders primarily assess your income vs outgoings to make a decision on affordability.
If your credit history is acceptable to the lender, your application will move onto the next stage.
Mortgage Term Vs Amortization
One of the most common sources of confusion for prospective home buyers is the difference between a mortgage term and amortization period. Here is a short answer: A mortgage term is the length of your current contract, at the end of which you’ll need to renew The amortization period is the total life of your mortgage. A typical mortgage in Canada has a 5-year term with a 25-year amortization period.
|Mortgage term||Mortgage amortization|
|Description||The length of time you are committed to a mortgage rate, lender, and conditions set out by the lender.||The length of time if takes you to pay off your entire mortgage.|
|Time frame||CMHC-insured mortgage: Maximum 25 yearsNon CMHC-insured mortgage: 35-40 years|
Also Check: Can You Get A Reverse Mortgage On A Condo
What Mortgage Term Is Best Why It Could Pay To Look Beyond The 30
Mortgage Q& A: What mortgage term is best?
Before you set out to snag the lowest rate on your home purchase loan or mortgage refinance, youll need to decide on a mortgage term.
Im referring to the amount of time it will take to pay off your home loan in full.
The mortgage term is essentially the duration of your mortgage, whether you actually keep it for that length of time or not.
Lets talk about why it matters and what factors may sway your decision in this department.
Mortgage Term Vs Mortgage Amortization
Join millions of Canadians who have already trusted Loans Canada
When you become a homeowner, there are going to be numerous house-related expenses that youll need to tackle regularly, from the moment you start paying your mortgage, until the moment you decide to sell your house. And the biggest expense of them all? The mortgage itself. No matter what youre doing around the house, whether youre mowing the lawn, or just sitting and watching television, the financial aspect of homeownership should always be somewhere in the back of your mind.
A mortgage allows a Canadian consumer to purchase a house and turn it into their home without having to spend their entire life savings. Instead, theyll pay for the house in installments every single month for a specific number of years . This process is known as amortization. However, within the amortization, homeowners will also have a mortgage term, at the end of which theyll have a chance to renew their mortgage contract. In fact, theres really only one key difference between a mortgage term and an amortization. In the article below, well talk a little bit about that difference, as well as the mortgage payment process.
Also Check: Which Way Are Mortgage Rates Trending
Length Of Mortgage Term Versus The Size Of The Payments
Although the payments will be larger with a shorter term mortgage, youll save a considerable amount of money in the long run in terms of interest and the total amount youll ultimately pay back . Just be sure that the shorter period works with your budget.
If your objective is to pay as little interest as possible, youll want to pay the mortgage back over as short a period of time as you can. By shortening the mortgage term youll reduce the interest you pay back but your monthly payments will be higher. Just remember to ensure that you can afford the monthly payments comfortably over the shorter term you have chosen.
On the other hand, if you want to keep your monthly payments as low as possible, you can achieve this by choosing a longer term with your lender. But, whilst this means youll be paying out less per month, it does mean youll pay more interest over the term of your mortgage. Also note that if you choose a term that means you will be paying monthly payments on your mortgage into your retirement, youll need to ensure that you have a plan for how youll do this.