What should be the term of my mortgage?

When it comes to choosing the mortgage term i.e. the number of years your mortgage should run, a lot of them come with arbitrary numbers with 25 years being the most common number. This article looks at what you should consider before choosing the right mortgage term.

Firstly there is no such thing as a right term it’s just what suits you best. 

In an interest only mortgage the term of the mortgage does not have much significance  If you borrow £100,000 at 4% per annum irrespective of whether you pay it over 1 year or 30 years the monthly payment will be £333 per month. This is because you only pay the interest and the balance outstanding at the end of the mortgage will continue to be £100,000. Given that interest only is not the most suited option for a vast majority of us, we should consider the implications of the mortgage term on a repayment basis.

In a repayment mortgage where the monthly payments go towards both the interest and the capital of the mortgage the term of the mortgage plays a significant role. In the same example of £100,000 at 4% interest rate (assuming the interest rate does not change at all) the monthly payment over 10 years will be £1,012, over 15 years will be £739 over 20 years will be £605 over 25 years will be £527  over 30 years will be £477 thus the longer the term lower the monthly payment.

All of us would dream for the day when we own our property outright and hence the lower the mortgage term the sooner our dream can come true.

The exercise of choosing the term is arriving at the shortest term in which the mortgage can be repaid bearing in mind that the shorter the term the higher the monthly payment and also taking into account even a fixed mortgage will drop into a variable rate at 1 point and hence the monthly payment is subject to fluctuation.

Going by the same example of £100,000 at 4% if a client told me they could pay £1000 each month I would suggest they consider a term of 15 years which will give them a monthly payment of £739and they can pay the balance (£216) as voluntary excess payments each month. This way if the monthly payment goes up because of a change in interest rate or if they have any extra un planned expense they have the freedom to reduce them mortgage payments by £216 per month – this approach is only suited for those who have a good financial discipline.

Other factors to bear in mind when choosing a mortgage term is to ensure that the mortgage completes before the anticipated retirement age of the applicants (unless they have an established retirement income)

Lenders today let you have a wide flexibility in the mortgage term so it’s less likely that they will not let you have a mortgage term that suits you best.

Another common mistake people tend to make is to think they will fine tune the term of the mortgage when they remortgage the property the next time. While remortgaging is common it’s important to ensure that you don’t assume that you will remortgage the property later. With something as important and significant as a property its best to take the right approach right from the start and not wait for the future to set things right.