One discouraging factor about mortgages is the length of time it takes to pay one back. The excitement of investing in the perfect home can dwindle under the knowledge of the 25-40 long years of repayments that stretch out before you.
A mortgage isn’t a short-term thing – it’s somewhat of a life-long commitment. If that has been a financial phobia for you, you might want to explore short-term mortgages. Yes, they do exist.
What is a Short-term Mortgage?
In contrast to its long-term counterpart, which you can pay off over 25 to 40 years, short-term mortgages range between six months and five years. And you will find that the length of the mortgage will vary from one provider to the next.
Lenders impose their own minimums, which can be anything from no minimum to as much as 15 years.
Short-Term Mortgages vs. Long Term Mortgages
Here’s a brief look at how short-term and long-term mortgages stack up against each other.
|Short-Term Mortgages:||Long-Term Mortgages:|
|Less interest over the term||More interest due to the long term|
|High monthly instalments||Low monthly instalments|
|Pay off the mortgage quickly||Saddled with debt long-term|
|Fluctuating interest rates (may rise)||Less affected by interest rate changes|
The Allure of Short-Term Mortgages
Short-term mortgages are undeniably alluring for many reasons, which are listed in brief below.
- Quick Ownership
For some, there’s a sense of urgency when it comes to owning a property. No one really wants to be saddled with debt for the rest of their lives, but it’s about more than that.
With a short-term mortgage, you’ll be able to pay off more monthly, leading to the loan being paid off quickly and the property ownership a lot quicker too.
Then there’s the matter of interest. The longer the loan term, the more interest you pay. While a short-term mortgage may cause you to pay a higher amount each month, it relieves you of the cumulative cost of a long-term loan.
Mortgages that stretch over 25 years or more may require smaller monthly instalments and interest costs, which aggregate into a large total at the end of the term.
- Mortgage 5 times salary.
- Can you get a mortgage on land?
- Refurbishment mortgages.
- Part and part mortgages.
- HMO mortgages.
- The Feeling of Running Out of Time
A person’s age may make the concept of a long-term mortgage unappealing. Not only will the loan run well into old age and present a financial strain on a limited retirement budget, but retirees or near-retirees pose a higher risk to lenders than actively working and earning individuals.
Lenders will find the prospect of lending money for a few years far more viable than giving a hefty lump sum to someone who is recently retired.
- Delaying the Sale of Existing Property
When getting a new mortgage, there’s the pressure of having to sell your existing home before you get into another long-term mortgage. With a short-term mortgage, you can start paying off your new property while waiting for your existing property to sell. There’s no immediate rush.
Qualifying Criteria for Short-Term Mortgages
Eligibility for a short-term loan will typically require you to meet with the mortgage provider’s specific terms.
These terms can change from one provider to the next, but the following factors are generally considered during the decision-making process. Not all lenders offer short terms.
- Affordability (this involves comparing your monthly income vs. expenses)
- Credit history
- Current earning bracket
- When was my house built?
- Buying out a sibling from an inherited house
- How long does it take to release mortgage funds?
- Does a valuation mean that a mortgage is approved?
- Mortgage lenders that accept benefits
- Can I extend my interest-only mortgage term?
The Complexities of Getting the Best Short-Term Mortgage Rates
Getting the best short-term mortgage rates in the UK depends on your unique financial situation.
It’s important to note that while each lender has its own terms and conditions in place, you may receive different mortgage deals and offers from different providers.
You won’t struggle for lenders if you’re considered a favourable candidate by meeting all the qualifying criteria.
If you’re earning enough money, have a good credit history, and can prove affordability, you will undoubtedly get better interest rates than poor credit borrowers.
If you happen to have poor credit, it doesn’t necessarily mean that a short-term mortgage is off the cards for you. Mortgage providers will consider your unique financial situation before coming to a decision.
If you’ve got poor credit but can afford to repay the monthly instalments, you may still find that lenders are willing to provide you with the loan.
The options will most likely be limited, and the interest rates will be considerably higher than someone with excellent credit and better affordability.
That said, there are always options out there, and by using a broker, you may find the ideal short-term mortgage for you.
Types of Short Term Mortgages
Typically, a short-term mortgage requires that you pay a higher monthly sum over a shorter period. In this section, we examine different short-term mortgages and what they mean for you:
Short-Term Fixed-Rate Mortgage
Getting a fixed rate short-term mortgage will largely depend on your credit history and your overall financial circumstances. With these mortgages, the interest rate you pay will stay the same for two, five, or ten years.
Short-Term Offset Mortgage
In an offset mortgage, the loan is linked to your savings account. The interest due is calculated by deducting the amount in your linked savings account from the mortgage balance. As a result, completing payments in an offset mortgage is relatively quick.
Short-Term Tracker Mortgage
Tracker short-term mortgages are a type of variable mortgage following an external interest rate. In most instances, a mortgage provider will use the same base rate as the Bank of England and then determine the interest rate they will offer borrowers.
Mortgage providers may also add or deduct a percentage of interest on top of this. Tracker mortgages aren’t for everyone, and it’s best to understand that if the Bank of England’s base rate increases, your mortgage rate could increase too.
Benefits of a Short-Term Mortgage
Short-term mortgages offer borrowers some great benefits, which are listed below.
Short-Term Mortgages are Flexible
Unlike long-term mortgages, where you are open to future financial risks, short-term mortgages allow you to pay the amount back quickly. Interest Rates
Interest rates are a big factor in a mortgage – the amount of interest you will pay on a home is substantial – there’s no getting around it. That’s what makes short-term mortgages so attractive.
If you’re in a fixed-rate mortgage, you will lose out when the interest rates drop, but if you’re only paying a short-term mortgage over two to three years (which is typical), the interest rate is less of a worrying factor than if you’re paying off a loan over 25 to 40 years. Shorter mortgage terms translate to less interest paid on a property.
It’s important to note that mortgages, short-term or long-term, are considerable financial commitments, and you shouldn’t blindly walk into one.
Always consider your options and chat with professionals in the field to ensure you’re choosing the mortgage option that’s best suited to your financial situation and affordability.
Call us today on 01925 906 210 or feel free to contact us. One of our advisors will be happy to talk through all of your options with you.