Now that you’ve set your budget and worked out a comfortable payment for you every month, it’s time to look at the mortgage term.
You may have been told (usually by your parents) to have 25-year mortgage. That’s because, a long time ago, that was the longest term that lenders would allow.
Things have changed now and it’s a good idea to set the term according to your circumstances.
Most lenders will lend to you for a maximum of 35 years (although one or two will allow up to 40). However, unless you are due to get a large pension, they will not want to lend past your retirement age. The only issue is that there is currently no age that you do actually have to retire. You will start to get your pension at age 67 or 68, but that doesn’t mean that you have to retire.
To counteract that, most lenders also won’t lend past your age 70 or when you intend to retire.
As the longer your mortgage means the lower the payment, this often means that a lender might consider lending more to you based on their calculations.
Whilst it’s tempting to say that you’re going to retire age 70, in order to borrow for as long as possible, it’s also sensible to consider this carefully. Whilst you may change lenders many times over your working life, every mortgage that you have involves a commitment for the whole term. It’s important to be realistic with yourself, can you really see your self wanting to do your job all the way to your 70th Birthday?
Once I have been able to give you a good idea of the amount that a lender would consider lending to you, and you have confirmed that you should be able to afford the property that you would like, it’s a good idea to see what the payments would be.
As we looked at previously, there are different types of mortgage rates, but we can get a good general idea of what the monthly payments could be.
Once we can see this, we can return to our monthly mortgage budget and see how it compares.
If the figure is considerably less, then you have a decision to make. You could think that this is a great thing and your life would be a lot easier and you will have a lot more expendable money every month. There’s nothing wrong with this way of thinking and a lot of my clients would agree with you.
HOWEVER. This would inevitably leave you paying far more in interest and compound interest over the years. We’re potentially talking about thousands. It also means that you could still be paying your mortgage in years to come when those around you have paid their off.
The other option would be to reduce the term. This would change the monthly payment to fit what you’re actually looking to pay. Not only will it potentially save thousands of pounds, it will also means that you could pay the mortgage off sooner.
Your future selves would thank you for it!
Of course, sometimes it’s not possible to reduce the term due to lender restrictions on things like their affordability calculator. In that case, review your monthly mortgage budget and if it still works for you, then it might be possible to over-pay every month. Quite a few lenders will allow a certain amount of overpayment every year with no Early Repayment Charge. If that allowance fits your budget, then you can make over-payments to achieve the same goal. It’s a great idea, but it’s also important to check your documentation before we make an application to the lender, to make sure that you can do this.
If the monthly mortgage cost is higher than your monthly mortgage budget, and the term is as long as it’s possible to be, go back to your monthly budget and see how fair you’ve been on yourself. If the answers still come back the same, then you’d need to ask yourself “is this the right mortgage for you?”.
There’s no right or wrong answer here, what’s important is that you have a mortgage that fits you and the way you live, rather than just living for your mortgage.