Mortgages are often set up over 25 years (or longer).
If you like the idea of paying off your mortgage sooner than this, then perhaps a short-term mortgage could be worth looking at.
By paying back your mortgage in 15 years, or less, you will have to afford the higher monthly repayments, but you will be charged a lot less interest overall.
Read on as we explain everything you need to know about short term mortgages.
What is a short term mortgage?
When you apply for a new mortgage you need to decide how much to borrow and how long you want to pay it back over.
This is the repayment term.
In the UK, most borrowers have opted for the ‘standard’ term of 25 years. This seemed to fit most peoples requirements.
Now there is more of a tendency to choose longer repayment terms, of 30 or even 40 years, so called marathon mortgages.
But if you need a shorter term for your mortgage then 5-15 year terms are available from most lenders.
What about short term bridging loans?
Bridging loans are a type of short term secured loan, rather than a mortgage.
They provide temporary finance with terms of 3-24 months. There’s no monthly repayments and the debt plus interest is paid all in one go at the end.
Bridging loans are a very flexible type of secured finance but they are a lot more expensive than a regular short term mortgage and you have to pay them back by the end of the term.
You will find more useful information in our Guide to bridging loans
Why take out a short term mortgage?
There are a number of reasons why borrowers choose a shorter term mortgage. Some of these are:
Pay less interest: If you borrow money over a shorter term then you will be paying the debt off faster, and reducing the interest charged.
Age: Getting a mortgage can be more difficult when you’re older. If your pension income is not acceptable to the lender then they will restrict your mortgage term.
Speed of repayment: If it’s affordable, many borrowers choose to repay the debt within a shorter period of time, perhaps while they know their earnings are going to be higher.
How much do they cost?
The cost of a mortgage is affected by the loan size, the interest rate and the loan term. Here are a few examples which should give you a rough idea of the difference. You can also use our mortgage calculator to more accurately see how different terms affect the repayments.
| 15 years | 20 years | 25 years | |
|---|---|---|---|
| £250,000 | £1976 | £1649 | £1461 |
| £500,000 | £3953 | £3299 | £2922 |
| £750,000 | £5930 | £4949 | £4384 |
The types of short term mortgages
Although your choices will depend on the lender you go with, here are the types of mortgage available:
Repayment mortgage: Most lenders will want you to have a repayment mortgage, where the debt reduces as you make your monthly repayments.
Interest-only mortgage: An interest only mortgage will have much lower payments than the equivalent repayment mortgage. This is because you are not paying any of the debt back.
Offset mortgage: Offset mortgages work by linking your cash savings to your mortgage. This has the effect of reducing the interest charged on your mortgage debt.
Fixed rate: Fixed rates are a popular choice as they protect against rate rises and help with budgeting.
Tracker rate: A tracker interest rate will be linked to a bank base rate, so it’s variable. Your payments will be affected by changes to the base rate but you will also benefit if rates fall.
Variable rate: Variable rates tend to be the more expensive choice. However, they can still be useful if you want to pay off your mortgage very quickly and want to avoid early repayment charges.
Advantages and disadvantages
There are several advantages to taking out a short term mortgage.
You pay off your mortgage quicker
You pay less in mortgage interest
You build equity more quickly
And a few disadvantages.
The repayments are much higher
The affordability criteria is stricter
You are contracted to pay the higher amount
Alternatives
Are there any alternatives to a short term mortgage?
Having a shorter term will make your mortgage reduce more quickly, but you are then committed to making the set monthly repayments.
Another option could be to take more of a standard mortgage term, and then make regular overpayments. You’ll still reduce the balance but the extra amount you pay will then be up to you.
It’s potentially more manageable but you will need to be disciplined on the overpayments.
If you are choosing a longer term because of your age then perhaps looking at other lenders might help.
Just because one lender requires your mortgage to be paid off in 15 years, does not mean that they all will.
Ask your mortgage broker to look at other suitable lenders.
How can you get a short term mortgage?
Getting a shorter term mortgage is much the same as getting a regular mortgage.
As the payments are much higher than normal, you may find that it’s harder to get a lender’s approval.
The main reason for this tends to be affordability.
Lenders are required to make sure that you can afford the monthly repayments. Not just now, but for the foreseeable future.
This can further be complicated if the term ends beyond age 65.
By working with a mortgage broker, they can help you find a lender, or a solution, that works for you.
How a broker can help
An independent mortgage broker will generally have access to around 100 different lenders.
Not all lenders work in the same way. Some always need a high deposit, others are more open to helping people with a complex income set up.
Your broker’s job is to find the deal that works best for you.
There are quite a few lenders that only work with brokers and intermediaries. So they can’t help people if they approach them directly.
Lots of these are specialist lenders that are willing to help in situations when the high street lenders aren’t so keen.
Your broker can discuss your circumstances with a lender, long before you complete an application. They will then help to gather all of the paperwork and information needed.
