Your mortgage term determines your capacity to repay your mortgage to a great extent. A term that is too short is likely to put financial pressure on the borrower. On the other hand, a term that is too long will not free the borrower from the burden of debt. This makes it important to pick a sweet spot that does not hamper your financial well-being.
It is common for mortgage borrowers to opt for a long-term mortgage to tackle high interest rates. As high interest rates increase the overall repayment amount, a longer term spreads the mortgage thin. This allows the borrower to make smaller monthly repayments over a longer time.
What Are Mortgage Borrowers In The UK Doing?
Owing to the ever-increasing inflation, the borrowing decisions of UK residents have changed. As compared to 8% of first-time buyer mortgages in the UK having a term longer than 35 years as of February 2022, the percentage went up to 18% this year. Over the same period, the number of 30-year and 35-year mortgages increased from 34% to 38%.
Looking at such data, you can imply that more and more mortgage borrowers are opting for long-term mortgages to even out the increase in interest rates.
So, why are they doing this?
The simplest answer is that longer mortgage terms bring monthly repayments down. As the UK faces the highest interest rates in the last 40 years, borrowers have no option other than increasing the terms of their mortgages. Especially in the case of first-time buyers who often barely meet the lenders’ criteria, longer mortgage terms help them manage their finances. A first-time buyer often works with a local mortgage broker. For example, if you looking to buy in Hounslow then you look for Mortgage Broker in Hounslow to find lenders ready to give long-term mortgage deals as per their preferences.
However, should you also be doing what most mortgage borrowers are doing?
The answer is not that simple.
Let us understand mortgage terms a little better and explore the pros and cons of long-term and short-term alternatives.
Is There A Maximum And Minimum Mortgage Term?
Most lenders provide two-to-five-year mortgages to their clients with the lowest mortgage terms. There are also lenders who give six months as their mortgage term. If you can afford such mortgages, it is better to purchase the property outright. Talking about the maximum limits, most lenders cap their deals at forty years.
Benefits Of Short-Term Mortgages
Despite being the road less taken, here are a few benefits of opting for short-term mortgages:
Cheaper overall repayment
When you opt for a short-term mortgage, the interest added to your monthly repayments will be less when you look at the bigger picture. As the number of months reduces, so does your overall mortgage repayment.
Quicker debt resolution
Not everyone likes having the burden of debt on their shoulders for decades. By getting yourself a short-term mortgage, you can get done with your debt quicker than carrying it over a significant amount of time.
Drawbacks Of Short-Term Mortgages
Let us now have a look at the significant drawbacks of getting yourself a short-term mortgage:
Higher monthly repayments
When your overall mortgage repayment is crunched into a shorter span, it will increase the amount you repay every month. This may put financial pressure on you until you repay the entire debt.
More impactful interest hikes
Once your fixed term ends, any increase in the interest rate will have a bigger impact on your monthly repayments as you are paying a bigger sum over a short time span. Short-term mortgages are much more sensitive to interest hikes than long-term deals.
Benefits Of Long-Term Mortgages
Here are the most important benefits of opting for a long-term mortgage deal:
Lower monthly repayments
Long-term mortgages spread out your overall repayment over a longer time, making monthly repayments cheaper. If you are struggling with your finances, it is advisable to carry the debt burden a little longer with such mortgage deals.
More stability with interest rate hikes
With lower monthly repayments, long-term mortgage deals are less sensitive to any increase in your interest rate once your fixed term ends. This makes you more secure and does not hamper your finances overnight.
Drawbacks Of Long-Term Mortgages
Long-term mortgages have their own set of drawbacks:
Longer debt burden
With a long-term mortgage, you will carry the burden of debt for several years, often spanning multiple decades. People’s financial circumstances often go through multiple highs and lows over such a long time period.
Higher overall repayment
While a long-term mortgage reduces your monthly repayments, it increases the overall amount you pay to your lender. Even if spread out over a long time, more months added to your mortgage will add to the total interest you pay by the end of your term.
Should You Take A Long-Term Mortgage To Tackle High Interest Rates?
If you are a first-time buyer who lacks the financial security to make high repayments amidst inflation, it is better to take a long-term mortgage in response to high interest rates. This may increase the overall repayment you make but will ease the immediate pressure of monthly repayments.
However, if you can afford to make higher monthly repayments and do not want to stay in debt for too long, it is better to refrain from long-term mortgages. This is also the right alternative if you are unsure about your financial circumstances ten to twenty years down the line. Ensure that your income allows you to make higher repayments while letting you save for a rainy day.
Whether you take a long-term or a short-term mortgage, work with an experienced mortgage broker to find a deal that best suits you. Finding a good mortgage broker is not difficult. Even simple Google searches along the lines of mortgage broker near me will lead you to the right professionals. Skilled mortgage brokers will assess your financial condition and connect you to lenders that have the best deal for you. It is difficult to go wrong when you are supported by an experienced mortgage broker!