How long should you take out a mortgage for?
While 25 years is the average length of a mortgage in the UK, some borrowers choose to make the period of repayment longer or shorter, depending on their circumstances. ASPC takes a look at the different options available.
With the average age of a first time homebuyer sitting around the mid-30s mark, a 25 year mortgage period may make sense: allowing the mortgage to be paid off before retirement. However, some people may choose to stretch this to 30 or even 40 years, in order to have smaller monthly repayments.
According to figures from the Bank of England, 35 per cent of mortgages in 2013 had a term of more than 25 years – up from the 22 per cent recorded in 2006.
While people may choose a longer term in order to pay smaller monthly payments (on average, a lender will be prepared to offer over four times your wage as a mortgage), this will cost more in the longer term due to interest charges.
For example, someone who has a £150,000 mortgage at four per cent over 25 years will pay £87,526 in interest. If the period of the mortgage is extended to 30 years, interest will rise to £107,804, while a 35 year mortgage will lead to £128,948 of interest.
Problems can arise for those who take out interest-only mortgages. While you still make monthly payments, these only cover the interest – and the full amount of capital remains to be paid after the mortgage period is up.
As an example, a £150,000 mortgage at five per cent over 25 years will cost £625 per month on an interest-only mortgage, and £877 per month as a regular repayment mortgage.
While it may be tempting to pay only interest, the full £150,000 will need to be paid back at the end of the 25 year period. New requirements brought about by the Financial Conduct Authority's Mortgage Market Review also mean that lenders can provide interest-only mortgages only if there is a credible strategy for repaying the capital, meaning those looking to take out such a mortgage will be questioned about their income, spending and ability to make payments if the interest increases.
No matter what term of mortgage you choose, most providers will allow people to pay a little bit extra each year without any penalties – about 10% is average. This can help reduce interest overall, and can even cut down the length of time left on the mortgage. However, make sure to check with your provider first, before making an additional payment, as some lenders will inflict penalties for overpayment. If you think you may want to make additional payments a flexible mortgage may be more suitable.
To ascertain your likely monthly payments on a repayment mortgage or an interest-only mortgage for any period between 10 and 30 years, take a look at our mortgage calculator. The figures are a guide, but can help show an approximate payment for each term.
The term you take for a mortgage is down to you and your circumstances. While some may be happy and able to pay the cost back over 15 years, others may decide to lengthen the term and pay more interest in order to be able to budget for the cost. Do make sure to take advice before finally choosing which product to choose.
Happy mortgage hunting!