Short Term vs. Long Term Fixed Mortgage Loan (2024)

FAQs

Short Term vs. Long Term Fixed Mortgage Loan? ›

Short-term mortgages typically come with lower interest rates but require higher monthly payments, as they are spread over a shorter period of time. As opposed to other types of mortgages, which are often spread over 15 to 30 years, short-term mortgages allow homeowners to rapidly build equity in their property.

Fixing your mortgage for longer can give you greater certainty as you'll know exactly what your mortgage repayments will be for the next 5 or 10 years. However, fixing for a longer term normally comes with higher interest rates - although rates for 5 year deals are lower than 2 year deals at the moment.

A shorter loan tenure results in higher EMIs, which may disrupt your financial management. Conversely, long-term loans lead to lower monthly payments. Missed EMIs or defaulting on loan payments can hurt your credit score.

Short-term Mortgages are a short-term mortgage generally has a term length of two years or less. This type of mortgage might be right for you if you think interest rates might decrease by the end of your term. Long-term Mortgages are a long-term mortgage has a term length of three years or more.

It may seem like lenders would prefer longer loan terms due to the higher total interest fees. But longer loan terms can be risky for lenders. Personal loans often have a fixed interest rate, meaning it does not change throughout the loan term.

A 15-year mortgage costs less in the long run since the total interest payments are less than a 30-year mortgage. The cost of a mortgage is calculated based on an annual interest rate, and since you're borrowing the money for half as long, the total interest paid will likely be half of what you'd pay over 30 years.

If, rather than going for a 25-year term, you choose a 30-year mortgage then your monthly payments will be reduced, giving you more cash to spend on things that are important to you. If you've struggled to get enough capital together for a deposit, a longer mortgage term makes owning a house more affordable today.

Likewise, better capitalized banks are more likely to issue long-term loans because they are more capable of dealing with the associated risks and absorbing potential losses. Bank ownership also seems to influence bank loan maturity.

Short-term loans versus long-term loans

Shorter loan terms typically mean higher monthly mortgage payments, but often have lower interest rates. And if you pay off your mortgage balance within a shorter term, you may pay less in interest overall than with a longer-term mortgage.

Short-term mortgages come with higher monthly payments but lower interest rates and less interest paid over the life of the loan because of shorter repayment periods. Short-term mortgages may be a good option to build equity or outright own the home faster than long-term mortgages.

What is the disadvantage of a long term mortgage? ›

One of the main disadvantages of a longer-term fixed rate is that your mortgage payments may be higher, at least initially. Choosing a seven or ten-year fix means you'll generally pay a small premium for the stability and security of a long-term deal.

Given that you need to make payments toward a long-term mortgage over a prolonged period, it costs less per month when compared to a short-term mortgage. However, it also means that the overall cost of the mortgage will increase because you'll need to pay interest charges over the long term too.

No collateral required: Unlike a secured loan, you do not provide collateral, such as a car or a home, to obtain a short-term loan. Lower credit score requirements: The credit requirements associated with short-term loans are typically less stringent than other types of borrowing, making it easier to get approved.

A long-term loan may also require more documents and take a longer time to apply for. So, you can choose a long-term personal loan if you require more funds and a short-term loan if you need a small amount. Remember, for your credit history, a long-term personal loan is better as your loan extends over a long time.

Long-term loans tend to carry less risk for the borrower, but interest rates tend to be at least slightly higher than for short-term loans. Long-term financing is typically used to cover equipment purchases, vehicles, facilities, and other assets with a relatively long useful life.

A mortgage is a serious financial commitment. If you are looking for a short-term, flexible mortgage, a two-year fixed option will likely work best for you, while those looking to work on steadier, long-term financial goals may benefit more from a five-year fixed mortgage.

A fixed rate loan is a loan that has a fixed interest rate and therefore fixed loan repayments. The time period of these loans can vary, but you can usually "lock in" your repayments for between 1-5 years. Although the fixed rate period may be 3 years, the total length of the loan itself may be 25 or 30 years.

Opting for a long-term fixed-rate mortgage means you no longer have to worry about these extra costs. Keep in mind that a product transfer with your existing lender may be another way to help you save on fees.

The choice of term length primarily depends on your financial situation and preferences. Shorter terms result in higher monthly payments but lower overall interest costs, while longer terms mean lower monthly payments but more interest paid over the life of the loan.