Your mortgage term is defined by the number of years the mortgage is taken over. For a capital repayment mortgage, the full mortgage will be repaid at the end of the term. For an interest-only mortgage, the full mortgage must be redeemed at the end of the term. In this blog, we’re going to take a look at how your term can be adjusted to suit your monthly budget and your mortgage affordability requirements.
Firstly, the mortgage term is not to be confused with the product term. The latter relates to how long the current deal lasts for, eg: a 5-year fixed rate, not the overall length of the mortgage. The end of each product term provides the ideal opportunity to remortgage. This can be done without incurring early repayment charges for leaving the product before the end of the term. When remortgaging, people will often keep the term the same as the number of years remaining on the current mortgage, to ensure it is constantly decreasing towards paying off the mortgage in full. However, this is not always appropriate and depends on the individual circumstances and future plans.
Financial Conduct Authority (FCA) guidance, as the regulator of mortgage advice in the UK, is that a capital repayment mortgage should be taken over the shortest practical term. What this means is that the mortgage should be taken over the shortest term where monthly payments are affordable in line with the current and future income and expenditure of the homeowner. The shorter the term, the higher the monthly repayments as the debt is repaid over a shorter period. Adjusting the term is the key, most controllable factor in determining monthly mortgage payments.
Across the mortgage market, there is an increasing trend in lenders allowing borrowers to get a larger mortgage for taking a longer term. This has always been the case when comparing taking a mortgage over a 10-year term compared to a 30-year term. You’ve always been able to borrow less when the term starts getting relatively low. However, the recent trend emerging is lenders allowing increased borrowing for each extra year the mortgage is taken over when looking at relatively long terms, eg: 30-years and above. While the increases are generally small, being able to save a few thousand on the deposit through a larger mortgage is often desirable. For those looking to borrow as much as possible, they may now need to take a longer term for the benefit of maximising their borrowing, when they could easily afford the monthly payments over a shorter term.
This is where overpayments come in. Overpayments are additional contributions, on top of the regular monthly mortgage payments, which allow you to pay off your mortgage faster. Overpayments can have the same effect as if the mortgage was taken over a shorter term. Most fixed rate mortgage products allow borrowers to overpay up to 10% of the total mortgage balance each year, before incurring early repayment charges. If you’ve chosen to take your mortgage over a longer term to increase your borrowing capability, over payments can be the way to negate taking longer than necessary to repay the mortgage.