Mortgages typically are an investment that spans decades, and during the mortgage term, the borrower is obligated to make regular payments to cover both the principal amount (loan amount) and the interest applied against it. However, in today’s economy, many lenders have begun to offer extended mortgage terms to cater to the market.
But why is this becoming more common, and just how long can a mortgage term last? In this article, we will go over the reasons why this is, as well as the possible maximum mortgage terms available in the UK.
What is the longest mortgage term possible?
In the UK, the longest mortgage term available is usually 40 years. This is primarily done to balance affordability for borrowers with the risk taken by the mortgage lenders. Nonetheless, the following are reasons for 40-year mortgage terms:
- Affordability – A longer-term mortgage reduces the amount of the monthly payment significantly, as the total amount borrowed is divided against the number of years in the term plus the applied interest rate. Furthermore, due to lower monthly payments, borrowers may qualify for a higher loan amount, making them great for first-time buyers.
- Rising property prices – Property prices can rise and fall (on an 18-year cycle theorised by some), and in areas such as London, home ownership has become increasingly difficult. This is made worse by the fact that wages tend not to rise as fast as properties, meaning the high cost of these properties requires a longer-term mortgage to even find eligible buyers.
- Demographic shifts – Young borrowers may prefer longer terms to minimise their monthly expenses, especially since young people typically start at lower incomes. This is seen as more secure by mortgage lenders, as young borrowers have a long working life ahead of them, and for those with good grades/experience, the likelihood of them rising through the ladder makes them good candidates.
- Lender risk management – Spreading repayments out across a longer period is a safer bet than a smaller period due to the lower monthly payments. This reduces the risk of a borrower default, which can severely impact mortgage lenders. Furthermore, there is potential for increased earnings on the side of the lenders, as the principal will remain higher for longer, meaning the interest rates will provide a solid income.
- Competition – Mortgage lenders are in competition with each other like any other business, and offering a 40-year term mortgage increases the pool of people available to borrow.
Bear in mind that lenders want their mortgage term to be paid off before a borrower reaches a certain age. This can be between 70-75 years of age, and many lenders will cap their mortgage lengths at these ages.
What are the typical mortgage term lengths?
Mortgage terms almost always play out over decades, unless the property is low value or the borrower comes into enough income to pay off the mortgage early. Regardless, the basic structure of a mortgage term determines the number of monthly payments, as well as their size and the total interest paid.
The basic structure is as follows:
- Principal vs Interest – The original amount you borrowed is your principal amount. Your interest rates, which come as a percentage, are then multiplied against your remaining principal as a fee for borrowing. This means that in the early years of your mortgage, you will be paying higher interest than later, as long as your principal is high, so will your interest.
- Amortisation – Amortisation of your mortgage term means that it’s planned to ensure the full amount of your mortgage is paid off, provided that the monthly repayments are made as scheduled.
- Fixed Rate vs Variable Rate – The interest rate applied to mortgages can either be fixed rate or variable rate, meaning it can be set at a single interest rate, or fluctuate based on chosen benchmark calculations (such as the Bank of England’s).
What are the typical mortgage term lengths?
The typical mortgage deal lengths range from 15 years to 30 years. The lower the years, the lower the overall mortgage payments – as interest is applied against the principal. As the principal shrinks, the lower the interest, and with lower years bring higher monthly repayments, shrinking that principal quicker.
This is illustrated best when pairing a 15-year mortgage up against a 30 year. Whilst these are substantial expenses, you can save a lot of interest in the long run and gain fast equity buildup. High equity means greater financial security in the long run, giving you an advantage when planning future finances, such as refinancing or selling the home outright.
15-year terms can often have 0.5% to 0.75% lower rates than 30-year mortgages and this can make a significant difference to borrowers. If, for example, you had a £250,000 mortgage at 3.5% interest, a 15-year term would cost around £72,000 in total interest paid versus £154,000 for a 30-year term at 4% interest.
Who decides the mortgage term?
Finding the right term is a collaborative effort between the borrower and the lender, with an analysis of income, expenditure and other factors being tallied up through an affordability assessment.
- Borrower preference – The financial situation, long-term goal and personal circumstances of the borrower are a large deciding factor in finalising a mortgage term. A borrower who wants to minimise monthly repayments even at the cost of interest rates and payments being high may go for a longer term.
- Lender criteria – Different lenders have different policies on mortgage term offerings. Some may specialise in giving a shorter-term mortgage, meaning that a borrower may have to specifically search for lenders who offer long-term mortgages. Furthermore, a lot of lenders may not be willing to meet the higher end of mortgage term lengths.
- Regulatory and market constraints – These regulatory guidelines often impose a maximum age limit by which a mortgage deal must end. This is typically between 70 and 75 years.
What mortgage term is best for me?
The best mortgage term for you depends on a variety of factors, too many to list. That being said, we recommend that you get in contact with a professional mortgage broker who can outline your options and choose the best mortgage term life for you.
When the Bank Says No is here to assist you. Our job is to learn the mortgage market inside and out, ensuring that we have access to the best mortgage lenders who can work with you to find terms that suit you best. When it comes to mortgages, affordability is the most important aspect.
Conclusion
All in all, the lengthiest mortgage terms will offer the lowest monthly repayments, meaning it’s easier in your wallet month by month. A long-term mortgage, however, does come with higher overall interest rates. Balancing your short-term ability to repay your debt with your future is the key to ensuring that you can achieve your dream house. When in doubt, consult a mortgage broker. When the Bank Says No is here to help.