How do mortgage terms work?
When you come to take out a mortgage, you may not think too deeply about the length of mortgage term. You should do, however, as it can make quite a big difference to your mortgage repayments and how much you end up paying over the course of the loan.
Many people opt for long mortgage terms, in the belief that long mortgage terms will ensure that their monthly mortgage repayments are kept relatively low. For some borrowers there is little choice - they simply could not afford to make the repayments if they attempted to pay back the mortgage over a shorter time span.
We've done a worked example below to show how mortgage terms can make a real difference. We used a mortgage calculator that was available on a popular mortgage comparison website.
Mortgage Terms: A Worked Example
We decided to take the example of an individual looking to take out a £100,000 mortgage.
Assuming an interest rate of 6% throughout the life of the loan (a big assumption), with a 25-year term to repay the mortgage, the monthly repayments would work out at £651.88. This assumes a straight repayment mortgage.
With the loan period reduced to 20 years, the monthly repayment increases to £726.53. Decreasing the period still further, to 15 years, the monthly repayment figure hits £858.02.
On the face of it, paying back your mortgage over 25 years (rather than 15), means that your mortgage repayments are more than £200 per month lower.
When you look at how much you repay over the course of the mortgage, a different picture emerges.
With a 25-year mortgage, you would pay more than £90,000 in interest during the course of the loan.
With a 15-year mortgage term, the figure drops to just over £50,000. Quite a difference.
Although these figures are a simple example, they do show the difference that mortgage terms can make. Although lengthening the mortgage term can help to keep your monthly repayments down initially, the end result is that you will pay significantly more interest over the life of the loan.
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2. Variable Rate Mortgages Explained
3. Capped Rate Mortgages Explained
4. Self Cert Mortgages
5. How do Mortgage Terms work?