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Published 04 April 2022
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What are Mortgage Terms and How do They Work?

When you apply for a mortgage, you will agree to a time frame for repaying the loan. This will affect how much you pay each month and over the lifetime of the mortgage.

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When you take out a mortgage, you’ll agree a mortgage term with your lender. The most common term is 25 years, but some stretch to 40 years. It’s important to understand what that number means for your finances over time.

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What are mortgage terms?

A mortgage term is the complete lifespan of the mortgage. It’s the number of years and months you’ll make payments to the lender until it’s paid off or, with an interest-only mortgage, until you finish paying interest on the original loan and repay the money you borrowed.

A mortgage term isn’t the same as a mortgage product, which is the rate of interest you pay for a certain period of time – such as a fixed rate for five years – before moving to another product or your lender’s standard variable rate (SVR).

How do mortgage terms work?

With a repayment mortgage, the term is the length of time you’ll take to pay back the money you’ve borrowed plus interest charged, and any other fees. Your balance will get smaller each month and, at the end of the mortgage term, there will be no outstanding debt, provided you’ve met all payments, and you will own the property outright.

So if you take out a 25-year repayment mortgage in 2021 when you’re aged 30, you’re set to be mortgage-free by 2046, when you’re 55.

With an interest-only mortgage, the term is how long you’ll pay interest charged on your original loan. At the end of the term, you’ll need to pay back the amount you borrowed in full.

How long are mortgage terms?

The standard mortgage term in the UK is 25 years, but longer-term mortgages of 30 or more years are increasingly common, with some lenders stretching to 40 years. The shortest mortgage term available is generally five years, but some go down to three years.

When you’re deciding on a mortgage term, bear in mind some lenders won’t agree to a term that extends into retirement. So they may stipulate a maximum age you can be when your mortgage term will end. The term you are offered will also relate to your financial situation and the affordability of the loan.

» MORE: Is a 40-year mortgage a good idea?

How do mortgage terms affect the interest you pay?

The longer your mortgage term, the lower your monthly repayments will be, as you’ll be spreading the cost over a longer period of time. But, as well as taking longer to pay off the balance, you’ll pay more in interest over the lifetime of the mortgage – and it’s no drop in the ocean.

For example, say you’re taking out a repayment mortgage and are borrowing £150,000 with an interest rate fixed at 3%:

  • Over a 25-year term, with a monthly payment of £711, you’d pay £213,387 overall, plus any additional fees.
  • Over a 40-year term, your monthly payment would be £537, and the overall cost would be £257,614, plus fees.

That’s a difference of over £44,000 – but bear in mind that fixed-rate mortgages can last for between two and and 10 years, so you would need to remortgage and switch to further 3% interest rate product to make these savings.

With a repayment mortgage, the amount of interest you pay is calculated on the amount left to repay. The rate will be fixed or variable, depending on the product itself. During the first few years, you pay more in interest than repaying the capital borrowed. Towards the end of the term, when you’ve paid most of the loan off, you pay more towards the loan amount than you pay in interest.

In contrast, the interest on an interest-only mortgage is charged on the full outstanding debt, which doesn’t decrease over time.

How long should your mortgage term be?

When it comes to the total cost of the loan, the shorter your mortgage term, the better. Not only will you save money in interest, but you’ll be mortgage-free sooner.

But the best mortgage length for you will depend on a few factors. Your personal circumstances, including your budget, your age, and the overall affordability of the loan all come into play, and a shorter term won’t suit everyone.

If you’re a first-time buyer, a longer term may be a more affordable way to get on the property ladder, due to the lower monthly payments. Just be aware that when you move off your introductory mortgage rate, you may be switched to a higher interest rate and your payments may increase, unless you remortgage to a similar or lower interest rate.

» MORE: Are you eligible for a mortgage?

How can overpayments affect your mortgage term?

Whatever your mortgage term, you may have the flexibility to make overpayments. This means paying more than the agreed monthly amount regularly or as a lump sum. This effectively shortens your mortgage term, as you’re clearing the debt more quickly.

There are usually overpayment restrictions though, where you can’t exceed a certain amount without paying a penalty. This is often the case with fixed-term deals. So make sure you’re clear on whether your mortgage agreement offers this facility, and when any penalties kick in. Also consider when the best time to make one-off overpayments is.

You can use our mortgage overpayments calculator to see how regular monthly overpayments might shorten your mortgage term, as well as the money you might save over time.

» MORE: Paying off your mortgage early

Can you extend or reduce your mortgage term?

It’s possible to change the term after taking out a mortgage. You’ll usually need to go through affordability checks, and you should factor in any fees charged by your lender.

Extending the term will reduce your monthly repayments, which may be useful if, for example, your income has gone down, but you’ll pay more interest for the life of the loan. Again, some lenders may be reluctant to extend mortgage terms for older borrowers, preferring the debt to be cleared before retirement.

Extending an interest-only mortgage term

If you have an interest-only mortgage and you’re concerned that your initial plan to raise the funds won’t reach the target in time, you may be able to extend your term. It’s crucial to contact your lender or speak to a financial adviser as early as possible to talk about your options. These may include switching to a repayment mortgage so that more time can be added to your term.

Should you make overpayments or decrease the term?

If you’re looking to pay off your mortgage sooner, you can take either route to achieve the same aim. Shortening the term means paying less interest overall, but make sure you can afford moving to regular, higher monthly payments. You may want to consider if the flexibility of making overpayments when you want to might be a better fit.

Changing your mortgage term can have a big impact on your finances, so be clear about your options before going ahead. Ask your lender if you have any questions and consider speaking to a mortgage adviser if you’re not sure what’s right for you.

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