A short term mortgage is one that’s paid back over 15 years or less. This type of mortgage comes with higher monthly repayments, but it means that you’ll pay less interest in total over the course of the loan.
Here, we explain everything you need to know about short term mortgages, including the benefits and drawbacks, the different types available, and how to get one.
Short term mortgages: what is a mortgage “term”?
The term is the length of time you have to pay back the money you’ve borrowed to buy your home.
The standard mortgage term in the UK is 25 years, but there are various mortgage lengths out there, ranging from six months to 40 years.
So, what is a short term mortgage vs a long term mortgage?
A short term mortgage is paid back over 15 years or less. In general, short term mortgages come with lower interest rates and higher monthly repayments because the loan is spread over a shorter period.
On the other hand, a long term mortgage is paid back over 30 years or more with lower monthly repayments and a higher rate of interest.
What are the benefits of a short term mortgage?
There are several benefits to taking out a short term mortgage. For example:
- You can own your home sooner: Plain and simple, the more you pay towards your mortgage each month, the faster you’ll pay off the loan, and the faster you’ll own your home outright.
- You can build up equity faster: In the period between taking out your mortgage and paying it off, you’ll be paying down the principal loan, chipping away at the amount you owe and building up the amount you own (your equity in the property). If you want, you can choose to release the equity in your home further down the line to fund home improvements or buy a second property.
- You can get a mortgage if you’re retired (or retiring soon): Some mortgage lenders won’t let you borrow over a long period when you reach retirement age as you’ll no longer have a regular income. If you can demonstrate that you’ll be able to pay back your mortgage in a shorter timeframe, a short term mortgage will let you buy a property even if you have fewer years left to work.
- You’ll pay less interest (and less overall): With a shorter mortgage term and fewer (albeit higher) monthly payments, there’s less time for interest to accrue on your loan. Depending on the size of your mortgage, you might end up saving tens of thousands of pounds over the course of the loan.
Here's an example of the difference between a 30-year mortgage and a 15-year mortgage:
- If you borrowed £150,000 over 30 years at 4% interest, you would pay £716 a month and £257,678 over the full term.
- But if you borrowed the same £150,000 over 15 years at 4% interest, you would pay £1,109 a month and £199,662 over the full term.
Try our mortgage repayment calculator to see what your repayments could look like.
What are the disadvantages of a short term mortgage?
There are two main drawbacks to taking out a shorter term mortgage:
- Monthly payments are higher: Because the loan term is shorter, you’ll be paying more each month to clear it. Often, this means payments are higher than if you took out a long term mortgage for the same amount.
- Loans are smaller: The high monthly repayments make short term mortgages riskier for lenders. The affordability criteria (the information they use to see whether you qualify for a mortgage) tend to be stricter. Even then, many lenders won’t offer large mortgages to be repaid over a short period. So, if you want to purchase an expensive property, you may find that taking out a longer term mortgage lets you borrow more.
What are the different types of short term mortgages?
Just as long term mortgages come with different features and conditions attached, there are a variety of short term mortgages on the market today. Let’s explore some of these in more detail.
You can also read our guide to the different types of mortgages here.
1. Short term interest only mortgages
A short term interest only mortgage is where the borrower only pays back the interest on the amount borrowed. The total amount isn’t due until the end of the mortgage term.
For some people, this is handy because it makes their monthly payments much lower. But you need to prove that you have a plan in place to pay back the whole loan at the end of the term.
For example, this could be evidence of savings (or a savings plan), a private pension, or an investment portfolio. Some lenders will also want a large deposit (sometimes up to 50%) and evidence of a high personal or household income – over £75k to £100k – before accepting you for an interest only mortgage.
2. Short term fixed rate mortgage
A short term fixed rate mortgage means your interest rate stays the same for a fixed period. This can last for two, five, or ten years – or even the entire mortgage term.
This type of mortgage is incredibly popular as it gives you the certainty of knowing how much to budget for your mortgage payment each month.
3. Short term tracker mortgage
A short term tracker mortgage follows a particular interest rate (for example, the Bank of England base rate) to determine what you pay each month. The lender then adds a fixed amount on top. If the base rate goes up or down, so does your interest rate.
4. Short term offset mortgage
A short term offset mortgage lets you use your savings to reduce the amount of interest you pay on your mortgage each month. To do this, you need to open a current or savings account with your lender and link that account to your mortgage account.
Here’s how it works: Let’s say you have £10,000 in your savings account and £100,000 left to pay on your mortgage. You’ll only need to pay interest on £90,000 (£100,000 - £10,000). This is because the mortgage balance is ‘offset’ by your savings.
How do I get a short term mortgage?
On the face of it, getting a short-term mortgage is the same as any other kind of mortgage. You simply need to meet the lender's criteria when you apply.
However, these criteria can often be quite a bit stricter for short term loans since the monthly payments are much higher.
When you apply for a short term mortgage, the lender will want to know that you can pay back the loan on time, so they’ll ask to see documents to prove things like your identity, address, earnings, and spending habits. They’ll also take your age, credit history, and employment status into consideration.
Here’s a quick reminder of what you need to apply for a mortgage.
Can I find a short term mortgage loan with Habito?
Yes! As a whole of the market mortgage broker, we can search across 20,000 mortgages from over 90 lenders to find the right short term mortgage for you. Get started today, for free!