There are many factors to consider when deciding on the ideal mortgage term for you. The right mortgage term must align with your financial situation and long-term goals. It’s vital to make the right decision as it can have a significant bearing on your financial future.
Understanding mortgage terms
The mortgage term is simply the duration you pay back the mortgage for. One of the decisions you’ll need to make when choosing the type of mortgage to opt for is how long you’re going to give yourself to repay your loan and the interest. Traditionally, this period was 25 years, though in today’s market, 15, 20 and 30 year mortgages are also common.
Two to five years is typically the minimum mortgage term available and 40 years, the maximum.
Monthly payments vs total interest costs
Shorter mortgage terms typically lead to higher monthly payments with lower total interest charges over the life of the loan, while longer terms offer lower monthly payments but with higher total interest charges.
Financial situation assessment
Lenders take the mortgage term you’re applying for into account when carrying out their affordability assessment. This is a key part of their evaluation and can impact the sum they are willing to lend you.
It’s important to establish what you can comfortably afford before making an application. Assess your current financial situation, looking at factors such as your income stability, any existing debts, your monthly budget, and expenses.
Online repayment calculators can be useful for comparing how shorter and longer mortgage terms could affect your monthly repayments.
Long-term financial goals
Your long-term financial goals are very important when considering the most suitable mortgage term. For example, if you are buying your ‘forever’ home, a longer mortgage is a good choice. It would provide the opportunity for you to invest additional funds elsewhere. If you have plans to move within ten years or retire imminently, a shorter term may be more suitable for you.
