Warning: Late repayment can cause you serious money problems. For help, go to moneyadviceservice.org.uk
Warning: Late repayment can cause you serious money problems. For help, go to moneyadviceservice.org.uk

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Mortage Terms Compared­

15 year or 30 year term?

Mortgages have been with us for decades, they have become the standard route to homeownership, but they also offer an ideal avenue for existing homeowners to raise capital at a lower rate than through an unsecured loan. For these reason they are also known as secured loans, or homeowner loans.

The industry standard for a mortage is a 30 year fixed term, with repayments which are usually fixed or flexible depending on whether the loan is a fixed type or a variable/tracker type, which follows the Bank of England base rate.

30 year terms have become standard because they offer a balance between time of repayment and affordability. It's the same in the United States wth 86% of people applying for 30 year mortage terms.

How does the Term Affect the Cost?

However, in more recent times people are starting to opt for 15 year fixed terms instead of the longer 30 year term. The loan types themselves are structually very similar with the main difference obviously being the time required to repay your borrowing. A 15 year term will mean higher repayments, because you have to repay the debt of your home in half the time, but at the same time, it will likely cost you less than half the cost in interest payments.

As with life, time is precious and the main driver of high costs is the duration of the borrowing. If you borrow money for longer, then the lender needs to recoup more to offset their costs. The cost is still cheaper than an unsecured loan because the lender has the security of your house if you fail to meet repayments for a specific amount of time.

The borrower pays interest on an annual basis agains the balance of the outstanding loan. The monthly payment is almost always fixed which means that the further into the loan you make your repayments, the more of that payment actually goes into reducing the balance of your debt, rather than off-setting interest payments.

On a 30 year loan, the balance of your property will reduce more slowly, as effectively you're borrowing the same amount of money for twice as long, so the interest is span further. At an interest rate of 4%, the borrower would actually pay almost 2 and a half times more interest on a 30 year term as opposed to a 15 year term.

Best of Both Worlds?

Although 15 year terms are increasing in popularity, most borrowers unfortunately lack the surplus cash to meet the repayments of a 15 year mortage, despite the lower interest costs. However one tactic is to simply borrow over 30 years BUT make the repayments as high as you can afford, assuming that your mortage agreement doesn't have a charge for overpayment or a maximum overpayment clause. If you manage to meet the higher payments of a 15 year term, even in a 30 year borrowing period, you will still pay off your mortage in a 15 year window.


Many buyers will be better served if they go for a 15 year term if they can afford it, however if you can't then the solution if simple, go for a longer term with a lender who allows you to make overpayments and try and pay back as much as possible each month. If you have a specific amount in mind, try and keep paying that amount consistently each month, and you'll be amazed at how quickly you can unburden yourself from your borrowing!

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