Long Term Loans
The maximum term of a loan varies depending on what type of loan you are applying for.
Mortgages let you borrow more significant amounts of money and pay it back over a long time, typically three to 35 years.
Unsecured loans are for smaller amounts (£1,000 - approx £40,000) and are repaid in a shorter time, usually one year to seven years.
Remember, with an unsecured personal loan, you won't lose your home if you can't make payments. However, with any type of mortgage, you could lose your home if you don't keep up with payments.
What Is Considered A Long-Term Loan?
A mortgage or second-charge loan can be borrowed over 30 years or 35 years, which is considered a loan term loan.
The actual number of years you can borrow over depends on several points:
- Your retirement age. Lenders have different criteria in terms of the maximum term of a loan. A key factor is your retirement age. If you wish to borrow money after retirement, lenders will ask about your pension income. They want to ensure you can repay the mortgage with your pension or other guaranteed income.
- If you are offering a leasehold property as security, the lender typically insists that there is a minimum number of years remaining on the lease at the end of the loan term. For example, if 80 years remain on the lease and the lender requires at least 65 years left at the end of the loan term, the maximum duration of a loan would be 15 years.
- Some lenders restrict the repayment term when the purpose of the loan is to purchase a car. The rationale is that if someone bought a car for £10,000 over 20 years, the vehicle would likely be scrapped or sold while you are still making repayments.
How Long Are Personal Loan Terms?
Unsecured personal loans are generally available over repayment terms of one year to five years. For larger unsecured loans, some lenders are prepared to offer a repayment term of 7 years.
Generally, borrowing money over the shortest term you can comfortably afford is better. By doing this, you make loan repayments over a shorter period and pay less interest.
If you have poor credit, your options for a loan will be limited. You will likely be offered a small loan at a high-interest rate. You need to think carefully before taking out this type of loan. The amount might not be enough for you to fund your chosen project, whether that’s a wedding, home improvements or something totally different.
It may be worth considering applying for a secured loan where lenders offer a longer period to repay the loan. These second-charge mortgages usually are more flexible as the lender holds your property as security. This means that if you default on repayments, they can take possession of your property to recoup their monies.
Early Repayment Charges On A Long Term Loan
Many mortgages include early repayment charges. This means that if you repay the loan early, before the end of the term, you may incur an early redemption or repayment charge (ERC). Any ERC clauses will be set out in the mortgage illustration that you receive.
A good mortgage broker will source the most appropriate loan product for you. They will collect your personal information to assist you and seek to understand your short- and long-term goals. This will be done through a Fact Find exercise.
From the details collected, they will make a recommendation which might be a variable or fixed rate interest loan. If you intend to keep the loan for a very short period, say two years, then your mortgage advisor will consider this and look for a product with no ERCs after the first two years.
Remember to work with a mortgage broker who is regulated and authorised by the Financial Conduct Authority (FCA) and who holds a Certificate in Mortgage Advice and Practice (CeMAP).
You should be looking to work with a mortgage broker specialising in mortgages, homeowner loans and equity release.
Why Are Long-Term Loans Attractive?
People are attracted to long-term loans because the longer the repayment term, the lower the monthly repayment.
While on the one hand, it’s appealing to have the lowest possible monthly repayment, keep in mind that you might be making monthly repayments for a very long time. The longer the term, the higher the interest you’ll pay.
One positive is that most lenders will allow you to repay additional capital.
Regardless of your mortgage term length, you might have the option to make overpayments. This involves paying more than the agreed monthly amount regularly or in a lump sum. This leads to a shorter mortgage term since you reduce the debt more rapidly.
This feature is handy for those receiving overtime or bonuses who can make regular overpayments.
However, it's essential to understand that there are typically restrictions on overpayments, especially with fixed-term deals. There might be a maximum or minimum of how much you can overpay without penalty. Therefore, it's crucial to understand the overpayment rules in your mortgage offer and know when any penalties may apply.
You can use a mortgage overpayment calculator to estimate the impact of regular monthly overpayments on your mortgage term and the potential savings over time.
What are Short-Term Loans?
Some people refer to short-term loans as bridging loans which are different to short-term unsecured loans.
A bridging loan is secured against a property that you own. It bridges the gap when you want to buy a property but need funds from selling another.
These loans typically have a repayment period of 12 months, and one feature is that borrowers do not make monthly repayments.
Interest rates with bridging finance are often considerably higher than traditional mortgage rates. In addition, the set-up costs can be high. These costs might include:
An arrangement fee - these vary but are typically 2% of the amount borrowed
An exit fee - some lenders charge a fee if you settle the loan before the end of the 12 months
An administration fee
Interest Only Mortgage Term
Similar to repayment second-charge mortgages, the term of an interest-only mortgage can be from three years to 30 years or more.
The big difference is that you are only paying interest each month, meaning that you will still owe the amount you borrowed when you took out the mortgage at the end of the term. Your monthly repayment will be the same regardless of whether you take out a mortgage for three years or 35 years.
Some people choose an interest-only mortgage, thinking their property will gain value and they will gain equity over time. When working out the equity, remember that you owe the same amount to your mortgage company as you did when you took out the mortgage.
If you had taken out a repayment mortgage, the amount owing to your mortgage company would have reduced, provided you had made all the agreed repayments.