What mortgage term should I choose?

Finding the right mortgage for your particular circumstances can be one of the toughest decisions to make without the help of a professional, whole of market mortgage broker. Two key factors in any mortgage are the ‘term’ or length of time it is taken over, and the ‘rate’ or amount of interest charged to the amount of money that you borrow.

Term and rate are the two key features of any mortgage offer and deciding which is most important to you will largely guide your decision and determine the amount that your mortgage costs you, both on a monthly basis and overall.

A little like buying a car, one marque will offer more features, while another will be cheaper to buy and run. If low-cost is more crucial to your budget, you are probably less concerned about the badge on the front of your bonnet. However, if you have a larger budget, chances are you may consider cars which offer high performance or have premium features, even though this may come at a greater price.

Is a ten-year fixed rate mortgage a good idea?

For some homeowners, knowing exactly how much your monthly mortgage repayments will be each and every month is most important. A fixed rate mortgage can provide certainty and enable you to budget accordingly as part of your monthly outgoings. Fixed rate mortgages are available in a wide range of terms from two up to 15 years.

When interest rates are low, it can be tempting to opt for a long period with a fixed rate, but these can be more expensive. Broadly speaking, the longer the period you fix your mortgage for, the more it will cost you as the interest rate will often be higher than with a shorter fixed rate period.

It’s also important to consider how long you plan to stay in your home and whether your circumstances are likely to change within the time period of your mortgage. Many fixed rate mortgages will have an early redemption charge should you choose to end your mortgage agreement before the fixed rate period is complete. This can be as much as five per cent of the mortgage loan and could potentially cost you thousands of pounds in an early redemption charge.

Depending on your life stage, if your family is growing or you are likely to want to downsize or move, it may not necessarily be sensible to take a long term fixed-rate mortgage, which may limit your options or cost you to get out of, unless it is a portable product.

Similarly, if you are likely to want to remortgage to release equity in your home for improvements or to finance a car purchase, you may be limited in your ability to release cash from the value of your home.

How many years should I take my mortgage over?

When considering which mortgage to choose, lenders will provide projections of monthly mortgage repayments based on your individual circumstances, often with a starting point of 25 years.

This will largely depend on the age of the applicant as many mortgage lenders have an upper age limit of 65-70 to coincide with retirement age, although some lenders will offer a mortgage up to the age of 70-85 years.

However, while many lenders typically quote mortgages over 25 years it’s worth looking beyond the ‘status quo’ and thinking about what product and period suits your needs.

If you are younger and affordability is an issue, a longer term may be useful to help you get a foot on the mortgage ladder. However, interest rates are low and borrowing is relatively cheap at the moment, so think about how much you can realistically afford to pay for your mortgage each month and consider the length of the term, as reducing this can help to reduce the cost of your mortgage overall.

If, for example, you reduce the period of time you take the mortgage over, you will reduce the amount of interest you pay and spend less buying your property. Conversely, if you extend your mortgage to 30 years you will reduce the monthly payments.

Think about and talk with your mortgage broker about your long-term plans as a good broker will consider how to help you secure a mortgage which meets with your needs and help you to avoid paying more for your home than you need to.

Case study: Repayment and interest on a £280,000 mortgage

As an example, NM Finance recently helped one homeowner to organise a £280,000 repayment mortgage at a rate of 1.57%.

Taken over 25 years, the mortgage would have cost £338,716, with a monthly payment of £1,129.

However, by reducing the term to 17 years, the client’s monthly payments rose to £1,565 and will cost £319,208.

This saves the homeowner £19,508 in interest and means they will be mortgage-free eight years earlier.

It’s best to consider your mortgage in the wider context of your monthly budget and think about how much you can afford to pay. To calculate the cost of a mortgage including monthly repayments over different terms, use our calculator.

Should I choose a short-term mortgage?

A short-term mortgage of 20 years or less will generate a higher monthly repayment but will cost you less in interest payments. You will pay your mortgage off quicker and be mortgage-free in less time. However, as your mortgage repayments are higher, you are possibly more likely to feel the effect of rate changes during a shorter-term mortgage.

What are the benefits of taking a two-year fixed rate mortgage?

Taking a mortgage over a shorter fixed rate period can also be beneficial in enabling you to keep your money fluid and releasing equity to reinvest in other long-term investments, such as a second property, buy-to-let or commercial premises.

A mortgage is one of the cheapest forms of borrowing, and if you are able to maintain the term of your mortgage but increase your monthly payments slightly each time you remortgage, you may be able to take advantage of greater loan to value (LTV) mortgages. Although you will not reduce the term of your mortgage, you may be able to release some of the equity from your home’s value and access funds for other investments.

One thing to consider is that each time you remortgage there are likely to be fees to cover the cost of organising the new loan. You will need to factor these into the total cost of the mortgage over the chosen term.

How to reduce your mortgage term

Many mortgages will allow you to overpay your mortgage, usually by 10 per cent of the outstanding debt, without incurring a repayment charge. This can be an incredibly effective way to reduce your mortgage term and the amount of interest that you pay for your mortgage.

Some mortgage lenders will allow you to overpay on a flexible basis, and even repay the overpayment to you if you need it – check with your lender to find out more. It’s also important to find out how your mortgage calculates the amount you can overpay – while some calculate this on a daily basis, some calculate the amount at the end of a calendar year which might provide a slightly different figure – contact your broker to find out more.

What is mortgage protection?

Whichever term you choose to take your mortgage over, it is important to ensure that you are able to meet the monthly repayments over the term of the mortgage. Our circumstances can change and one way to protect you if you are unable to work through sickness or disability, or if you die.

While no-one wants to imagine these situations, protecting yourself will soften the financial blow to your family should the unthinkable happen. There are numerous policies which can provide cover at the level and in the way that best suits you and your family, so speak to NM Finance to discuss your circumstances.

Expert mortgage advice Norwich

When you work with a mortgage adviser, they will calculate a series of different scenarios based on your individual circumstances and needs. While there are online calculator tools available, a whole of market mortgage broker such as NM Finance will have a thorough knowledge of a wide variety of mortgages, including specialist products, and know which lenders may be more willing to lend in your situation.