How to decide between a 15-year and 30-year mortgage

July 19, 2024

Sett

When deciding between a 15-year and 30-year mortgage, it’s essential to understand the differences and how each option can affect your financial situation.

This guide will help you evaluate both mortgage terms to make an informed decision that aligns with your financial goals and lifestyle.

What is a 15-year mortgage?

A 15-year mortgage is a home loan that is repaid over a period of 15 years. This shorter term means higher monthly payments compared to a 30-year mortgage, but it also means paying off your mortgage faster and potentially saving money on interest.

Benefits

Lower interest rates: 15-year mortgages typically offer lower interest rates than 30-year mortgages, which can save you a significant amount of money over the life of the loan.
Faster equity build-up: With higher monthly payments, you pay down the principal faster, building equity in your home more quickly.
Less interest paid overall: The shorter loan term means you’ll pay less in interest over the life of the mortgage, which can result in substantial savings.

Drawbacks

Higher monthly payments: The biggest downside is the higher monthly payment, which can strain your budget if your income isn’t sufficient to handle the increased expense.
Reduced flexibility: Higher payments may limit your ability to save for other goals, such as retirement or education.
Potential for financial strain: If your financial situation changes, higher payments might become challenging to maintain, increasing the risk of default.

What is a 30-year mortgage?

A 30-year mortgage is a home loan that is repaid over 30 years. This longer term results in lower monthly payments compared to a 15-year mortgage but means you’ll be in debt for a longer period and pay more interest over time.

Benefits

Lower monthly payments: The most significant advantage is the lower monthly payment, which can make homeownership more affordable and leave room in your budget for other expenses.
Greater flexibility: Lower payments allow for more financial flexibility, enabling you to save or invest money elsewhere.
Easier qualification: Lower monthly payments can make it easier to qualify for a mortgage, as the debt-to-income ratio is more favourable.

Drawbacks

Higher interest rates: 30-year mortgages typically come with higher interest rates, which means you’ll pay more over the life of the loan.
Slower equity build-up: With lower monthly payments, you pay down the principal more slowly, which means building equity in your home takes longer.
More interest paid overall: The longer loan term results in significantly more interest paid over the life of the mortgage, increasing the total cost of your home.

Comparing the costs

Let’s look at some examples of the costs.

Monthly payments for a 15-year mortgage are higher because you’re paying off the loan in half the time compared to a 30-year mortgage. For example, if you borrow £200,000 at a 3% interest rate, your monthly payment on a 15-year mortgage would be about £1,381, while a 30-year mortgage would be about £843.

The total interest paid over the life of the loan is much lower with a 15-year mortgage. Using the same example, the total interest paid on a 15-year mortgage would be approximately £48,000, whereas a 30-year mortgage would result in approximately £103,000 in interest.

The impact on your overall budget depends on your financial situation. A 15-year mortgage requires higher monthly payments, which might limit your ability to spend or save in other areas. A 30-year mortgage offers lower payments, providing more flexibility but at the cost of higher interest over time.

Consider your financial situation

When choosing your mortgage term, it’s crucial to consider your financial situation. Here are some things to think about:

Income stability

If you have a stable and high income, a 15-year mortgage might be a good fit because you can handle the higher payments without financial strain. However, if your income is variable or uncertain, the lower payments of a 30-year mortgage might be more manageable.

Long-term financial goals

Your long-term financial goals are crucial in this decision. If paying off your home quickly and saving on interest is a priority, a 15-year mortgage aligns with that goal. On the other hand, if you prefer to have lower payments and use the extra cash for investments, retirement savings, or other expenses, a 30-year mortgage might be more suitable.

Current debts and expenses

Consider your existing debts and monthly expenses. High monthly payments on a 15-year mortgage might be challenging if you have significant debt or high living expenses. A 30-year mortgage provides more breathing room in your budget, which might be necessary depending on your financial obligations.

The impact on home equity

A significant advantage of a 15-year mortgage is the faster build-up of equity. Higher monthly payments mean that more of your payment goes toward the principal rather than interest. This can be beneficial if you plan to sell the home or take out a home equity loan in the future.

With a 30-year mortgage, building equity is slower because a larger portion of your payment goes towards interest, especially in the early years. This means it will take longer to own a significant portion of your home, which could be a disadvantage if you need to access that equity sooner.

Flexibility and lifestyle considerations

Lower monthly payments with a 30-year mortgage provide greater flexibility in your budget. You can use the extra money for other investments, savings, or living expenses, which can enhance your overall financial security and lifestyle.

Higher monthly payments with a 15-year mortgage can impact your lifestyle, as you might have less disposable income for discretionary spending, travel, or other activities. It’s essential to consider how these payments will affect your day-to-day living and whether you’re comfortable with the trade-offs.

Assessing your long-term plans

If you plan to stay in your home long-term, a 15-year mortgage might make more sense, as you’ll own your home outright sooner and pay less in interest. However, if you anticipate moving in a few years, a 30-year mortgage might offer more flexibility with lower monthly payments.

Refinancing is an option to consider with both mortgage terms. If you start with a 30-year mortgage, you could refinance to a 15-year mortgage later if your financial situation improves. Conversely, if you start with a 15-year mortgage and find the payments too high, refinancing to a 30-year mortgage could provide relief.

Conclusion

Choosing between a 15-year and 30-year mortgage depends on your personal circumstances, financial stability, and long-term goals. A 15-year mortgage offers the advantage of lower interest rates, faster equity build-up, and less total interest paid, but requires higher monthly payments. A 30-year mortgage provides lower monthly payments, greater flexibility, and easier qualification, but results in higher interest rates and slower equity build-up.

Evaluate your financial situation, income stability, long-term goals, and current debts to determine which mortgage term best suits your needs. Remember, your choice will significantly impact your financial future, so it’s essential to consider all factors carefully before making a decision.

To talk about which term is best, contact our Sett Mortgages team today. We can support you and talk through various mortgage terms and costs.

Your home or property may be repossessed if you do not keep up repayments on your mortgage.