How a Shorter Term Saves You Money
The length of your mortgage term has an enormous impact on the total amount of interest you pay. A shorter term means you pay off the capital faster, giving interest less time to accumulate. The savings can be remarkable — reducing a 25-year term to 20 years on a £200,000 mortgage at 5% could save you over £35,000 in total interest.
When you remortgage, it's the perfect opportunity to reassess your term. If your income has increased since you first took out the mortgage, you may be able to afford higher monthly payments that come with a shorter term. Even reducing the term by just a couple of years makes a meaningful difference.
The Impact on Monthly Payments
Shorter terms mean higher monthly payments because you're repaying the same capital over fewer years. Using a £200,000 mortgage at 5% as an example:
- 25-year term: Approximately £1,169 per month — total interest £150,800
- 20-year term: Approximately £1,320 per month — total interest £116,700
- 15-year term: Approximately £1,582 per month — total interest £84,700
The monthly increase from 25 to 20 years is about £151, but the interest saving over the life of the mortgage is over £34,000. It's crucial to ensure the higher payments are comfortable within your budget, including a buffer for unexpected expenses or interest rate changes.
How to Decide the Right Term
Consider your current financial situation and future plans. Can you comfortably afford the higher payments without compromising your emergency fund or quality of life? Will your income remain stable, or could it change due to retirement, career changes, or family planning?
A useful approach is to stress-test your budget. If the higher payment would leave you with a comfortable margin, a shorter term makes financial sense. If it would stretch your finances uncomfortably, a longer term with regular overpayments gives you the same interest-saving benefit with more flexibility — you can stop overpaying if times get tough, but you can't easily reduce your contractual monthly payment.
Combining a Shorter Term with Remortgaging
Remortgaging to a better rate and a shorter term simultaneously is a powerful combination. If you move from a 4.5% SVR on a 23-year remaining term to a 3.8% fixed rate on a 20-year term, you benefit from both the lower rate and the reduced term. In some cases, the rate reduction alone can offset the increase in monthly payment from the shorter term.
Speak to a mortgage broker about modelling different scenarios. They can show you exactly how different combinations of rate and term affect your monthly payments and total interest, helping you find the sweet spot between affordability and long-term savings.
Important: Your home may be repossessed if you do not keep up repayments on your mortgage. There will be a fee for mortgage advice. The actual rate available will depend on your circumstances. Think carefully before securing other debts against your home.