How to Save Money by Reducing Your Mortgage Term
Higher Monthly Mortgage Repayments, but Pay Less Interest
Jun 13, 2009
It is possible to pay less interest and save money by reducing the mortgage term. Whilst a shorter repayment period does increase monthly mortgage repayments, it allows a homeowner to develop home equity quickly and enjoy outright ownership sooner.
Pay Less Interest with a Shorter Mortgage Term
- Mr & Mrs Stephens have a £150,000 loan at 4.8% over a 25 year mortgage term. Their monthly mortgage repayment is £869.21 and they will pay £180,000 in interest over the duration.
- Mr & Mrs Bennett have a £150,000 loan at 4.8% over a 15 year mortgage term. Their monthly mortgage repayment is £1188.05 and they will pay £108,000 in interest over the duration.
Although Mr & Mrs Bennet make additional mortgage repayments amounting to £57,391.20, they will pay £72,000 less interest as a direct result of the reduced mortgage term. The amount of money saved will depend heavily upon the mortgage rate that is available at the time.
Quickly Build Home Equity
The longer the mortgage term, the higher percentage of each monthly repayment goes towards repaying interest. This means that a homeowner not only saves money in the long run, but also increases home equity far more quickly. This helps to prevent negative equity in the event of a decline in property prices.
- Mr & Mrs Stephens make a loan payment of £869.21, but only £269.21 goes towards clearing the loan- 31% of the monthly repayment.
- Mr & Mrs Bennett make a loan payment of £1188.05, but £588.05 each calendar month goes towards clearing the loan- 49.5% of the monthly repayment.
A Reduced Mortgage Term Means Higher Mortgage Repayments
Although a reduced mortgage term means that a homeowner pays less interest, it also means higher mortgage repayments each month. For example, The Bennett's pay £318.84 more each month than the Stephens. This could potentially place a strain on family finances if affordability isn't established from the outset.
Decreasing the mortgage term allows a homeowner to save money, pay less interest and build home equity far more quickly. The clear downside to reducing term of a loan is that a homeowner will be expected to make higher monthly mortgage repayments. It is important to budget carefully in order to establish affordability.
Readers that found this article helpful may also be interested in reading more about fixed-rate mortgages, discounted mortgages or offset mortgages.
Disclaimer: This article in no way attempts to give legal or tax advice. One should consult a licensed attorney, tax advisor, or other qualified professional.
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