What is a short term mortgage?
Most mortgage lenders have set limits on how long they will lend money for, with the earlier of the client’s stated retirement age or age 70-75 being the cutoff point. The maximum mortgage terms available are usually 35-40 years.
One of the advantages of choosing a long mortgage term is that it will result in lower monthly payment. It is important to keep in mind that the longer the term of your mortgage, the more interest you will end up paying in the long run.
While it is possible to find mortgage terms as short as two years, the more common minimum term is five years.
Why do people take out short-term mortgages?
They are of an advanced age
One of the most common reasons that people take short-term mortgages is that they want to pay off their mortgage faster and become debt-free sooner.
This is often the case for people who are approaching retirement age and want to reduce their financial obligations before they stop working. By choosing a short term mortgage, they can make larger monthly payments and pay off their debt in a shorter amount of time.
They want to own their home sooner
Some people may choose a short-term mortgage because they want to save money on interest charges.
Short-term mortgages often come with lower interest rates than longer-term mortgages, which means that borrowers can save money on interest charges over the life of the loan.
This can be particularly beneficial for those who are able to make larger monthly payments and pay off their mortgage faster.
They want to build equity faster
Another reason why someone might opt for a short-term mortgage is to build equity in their home faster. Equity is the difference between the value of your home and the amount you owe on your mortgage. By paying off your mortgage faster, you can increase the amount of equity you have in your home, which can be useful if you plan to sell your home in the future or take out a home equity loan.
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Can I get a short-term mortgage loan?
When it comes to choosing a short-term mortgage loan, affordability is a key factor to consider. While short-term mortgages may offer the advantage of paying off your mortgage faster, they also come with higher monthly payments. As a result, lenders will typically require a higher level of affordability from borrowers seeking a short-term mortgage.
Affordability is determined by a number of factors, including your income, expenses, credit score, and existing debts. Lenders will typically evaluate your affordability by looking at your debt-to-income (DTI) ratio, which is the amount of debt you have compared to your income.
With a short-term mortgage, lenders may require a lower DTI ratio to ensure that you can comfortably afford the higher monthly payments.
What types of short-term mortgages are there?
Short-term mortgage – Interest only
If you are looking to keep your mortgage payments as low as possible, a short term interest-only mortgage may be worth considering. With this type of mortgage, you will only be required to make payments on the interest portion of the loan, rather than paying both interest and principal. This can result in significantly lower monthly payments.
Short-term fixed rate mortgage
Short-term mortgages are typically available over fixed rate periods for a minimum of 2 years, but can also be found for 3 and 5 years. This means that borrowers can lock in a specific interest rate for a set period of time, which can provide peace of mind and help with budgeting.
Short-term tracker mortgage
Typically, short-term tracker mortgages come in different time durations, ranging from 2, 3, or 5 years to an entire lifetime. These products are designed to track the performance of an underlying financial index or benchmark, providing investors with a cost-effective way to invest in the market.
One of the key benefits of a short-term tracker mortgage products is that they typically have low or no early redemption fees.
What are the benefits of a short-term mortgage?
Short-term mortgages can offer a variety of benefits, depending on your financial goals and situation. Here are some potential advantages of opting for a shorter-term mortgage:
- Pay less interest: Short-term mortgages typically come with lower interest rates than their long term mortgages. This means that you’ll pay less interest over the life of your loan, potentially saving thousands of dollars in the process.
- Clear the mortgage quicker: With a short-term mortgage, you’ll be able to pay off your mortgage balance quicker than you would with a long-term mortgage. This can help you achieve financial freedom and security sooner, allowing you to focus on other goals like saving for retirement or travelling.
- Build equity faster: As you pay down your mortgage, you’ll build equity in your home. With a short-term mortgage, you’ll be able to build equity more quickly, which can be helpful if you’re planning to sell your home in the near future or want to use your equity to access other financial opportunities.
- Qualify for a mortgage if you’re retiring soon: If you’re planning to retire soon, a short-term mortgage may be a good option for you. This is because lenders often look at your income and employment history when deciding whether to approve your mortgage application. With a short-term mortgage, you may be able to qualify for a loan based on your current income, rather than having to demonstrate income into your retirement which may be significantly lower.
Short-term mortgage vs long-term mortgage
Short-term mortgages typically come with lower interest rates, allow borrowers to pay off their loans more quickly, build equity faster, and may be easier to qualify for if you are retiring soon.
However, they often come with higher monthly payments. Long-term mortgages, on the other hand, come with higher interest rates, take longer to pay off, and may not build equity as quickly, but they offer lower monthly payments. It’s important to consider your financial situation and goals when deciding which type of mortgage is best for you.
In the scenario below an extra £119,631 interest it payable when borrowing over 25 years compared to 5, however the monthly payment is £3,251 more expensive. A large income would be required to secure a mortgage of this value over a shorter term. Standard loan-to-income multiples may not apply.
4% interest rate
5 years – £4,604 per month
£276,246 total repayments and interest
10 years – £2,531 per month
£303,735 total payments & interest
15 years – £1,849 per month
£332,859 – Total payments & interest
25 years – £1,351 per month
£395,877 – Total payments & interest
How can I get the best short-term mortgage rates?
If you decide to secure a mortgage over a shorter term, you may encounter some challenges in the process, for example more stringent affordability requirements.
However, working with an experienced mortgage broker like Strive Mortgages can prove invaluable in securing a mortgage with favourable terms. Working with a mortgage broker who specialises in arranging mortgages over a shorter term that has the expertise and industry knowledge necessary to guide you through the process and increase your chances of success.
We help you navigate the complex and often confusing world of mortgage lending and ensure that you find a mortgage that meets your unique needs and circumstances. By working with a skilled mortgage broker, you can save time, reduce stress, and ultimately secure a mortgage with the best rates.
How do i improve my chances of getting a short term mortgage?
Here are some steps you can take to improve your chances of getting accepted for a short-term mortgage:
Bigger deposit: Saving up for a larger deposit will demonstrate your ability to manage your finances and reduce the lender’s risk
Improved credit rating: Check your credit report for any errors or areas that need improvement. Paying bills on time, reducing debts, and maintaining a healthy credit utilisation ratio can help boost your credit score. Having a good credit history will open up more mortgage options.
Low Outgoings/Commitments: Lenders assess your affordability by considering your income and existing financial commitments. Reducing your outgoings, such as paying off debts or minimising monthly expenses, will improve your affordability and increase your chances of approval.
Speak to a Mortgage Broker: Consulting a mortgage broker can be beneficial as they have access to multiple lenders and can guide you through the application process. They can help find lenders who are more likely to accept your application based on your financial situation.
Frequently asked questions about short-term mortgages
A short-term residential mortgage is a loan that allows you to purchase a property with a traditional mortgage with a shorter repayment period.
In contrast, short-term bridging finance is a type of loan that is typically used to bridge the gap between the purchase of a new property and the sale of an existing one. It is often used in situations where funds are required quickly, and the repayment period is typically around 12 months or less. Bridging finance usually attracts significantly higher initial fees and interest rates.
When it comes to residential mortgages, lenders typically base their decision on your personal affordability, taking into account your income, expenses, credit history, and other factors. In contrast, bridging finance is usually based on the value of the security being used to secure the loan, such as a property or other asset. This means that the lender will focus more on the value of the security rather than your personal financial situation when considering whether to approve the loan.
Yes, it is possible to get a short-term mortgage on a buy to let basis. Like with traditional residential mortgages, buy-to-let mortgages can also come in various terms, including short-term options.
Short-term buy-to-let mortgages are typically used for investment properties that the borrower intends to sell or refinance in the near future. These mortgages can have repayment periods of less than five years and may have higher interest rates than longer term mortgages. Short-term buy-to-let
The availability of the best short-term mortgage deals will ultimately depend on your individual circumstances. If your financial situation is limited in terms of affordability, you may find that borrowing over a longer-term period gives you more options to choose from.
However, it’s important to weigh the pros and cons of both short-term and longer-term deals to determine which option is best suited to your specific needs.
Yes, self-build mortgages are available over shorter terms. The repayment periods for self-build mortgages can vary depending on the lender and your individual circumstances, but typically range from 6 months to 2 years.
Shorter-term self-build mortgages may have higher interest rates compared to longer-term options, but they can provide more flexibility and control for borrowers looking to complete their project quickly.
Short-term mortgages may be available for pensioners, but the availability and terms of the loan will depend on the lender and the borrower’s individual circumstances.
It’s worth noting that some lenders may have age restrictions on their mortgage products, with a cap at age 75 or 80.
This means that some older borrowers may have difficulty qualifying for a short-term mortgage, as they may not meet the lender’s age requirements. However, lifetime mortgages may be an option for older borrowers who want to borrow in later life.
Yes, it is possible to get a short-term offset mortgage. Some lenders offer flexible mortgage products that allow borrowers to offset their savings or current account balance against their mortgage debt for a specified period, typically ranging from a few months to a few years.