Why mortgage terms are getting longer
Not so long ago, a 25-year term was the default option for your mortgage and most people opted for this.
However, in recent years the length of mortgage terms has been growing. Research from London & Country mortgage brokers revealed that the number of first-time buyers taking out mortgages with terms from 31 to 35 years has doubled over the past decade.
Why are borrowers opting for longer terms?
The main reason borrowers are choosing to pay over a longer term is that the monthly repayments are lower. As the repayment is spread over a longer period, you pay less each month.
However, overall you’ll end up paying more as you’re charged interest over the longer term. Whereas, if you take out a mortgage for a shorter term, you’ll pay off more each month, but the balance will be paid off quicker – costing you less in total.
At one time, first-time buyers were able to take out interest-only mortgages to keep repayments down. But fewer lenders now offer this type of mortgage deal, so lengthening the term has been the only way to reduce monthly mortgage costs.
According to London & Country, the average mortgage term opted for by first-time buyers is currently 27 years. 22% of first-time buyers chose mortgage terms of 31 to 35 years – this is a rise from 11% in 2007, so there’s been a big increase over the last decade.
You can change your mortgage term at any time
The good thing about mortgage terms is that they’re flexible. Most borrowers will allow you to change at any time – although the length of the term may be dependent on an affordability check.
Lenders will also consider your age if you want to extend your mortgage term as they don’t like lending into retirement. Before you apply, think about how old you would be when you expect the mortgage to come to an end.
For most lenders, there’s usually plenty of flexibility around changing your mortgage terms. For example, it may be worth taking out a 30-year term on a fixed rate to begin with. Once the fixed rate ends, you’ll have paid off some of the outstanding balance and the property may have risen in value. You should be able to remortgage at that point at a lower loan-to-value (LTV) than when you first took out the mortgage. As a result, you may find there are more attractive deals on offer with better rates – allowing you to shorten the mortgage term but keep repayments the same.
Overpaying is a flexible option
You may be put off from taking out a longer-term mortgage by the fact that you could end up paying more overall. However, given the fact that you can make changes easily along the way, this isn’t always the case.
As we’ve seen, you have the option of switching to a shorter-term mortgage when it suits you. Another option is to overpay. Most lenders allow you to overpay your mortgage by 10 to 15% per year – you’ll need to check your contract for the exact details. Generally, you can overpay up to this amount at your own discretion – choosing when you wish to stop or start these overpayments.
As a result of overpaying, you can end up shortening the term of your mortgage – and reducing the total amount of interest you pay. The beauty of this option is that if your circumstances change, you simply stop the overpayments.
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