Making additional payments

Mart700

Hi all,

I’m a first time buyer and have saved up a large deposit. I'm looking to buy a property over the next year.

I have a bit of disposable income each month. I was wondering what the best approach to paying off a mortgage.

Should I take a 25 year mortgage and pay extra money each month thus paying off the capital quicker. Or should I take a 18 year mortgage thus having a larger monthly payment which would be an equivalent payment to the previous option.

Also if the interest rates increase I guess it would change the re-payment and taking the 25 year mortgage and paying extra would be my choice. I could stop the extra payment if money became tight. Where as taking a 18 year I would have no choice on how much I paid each month.

I know that a fixed rate mortgage will likely come with an early repayment charge. I wasn’t sure if this just applied to paying off the entire mortgage within the fixed term contract or if it also included paying extra each month.

I guess this is quite a complex issue and I will need to speak to a mortgage advisor but I was wondering if anyone has experience of this and what they know.

Kind regards

Mart

HelpWhereIcan

Mart700 wrote: »

Should I take a 25 year mortgage and pay extra money each month thus paying off the capital quicker. Or should I take a 18 year mortgage thus having a larger monthly payment which would be an equivalent payment to the previous option.

It will be a case of "6 and two 3s" as my dad used to say. As long as you can make overpayments and make the 18 year payment, your 25 year mortgage will be paid off in 18 years as you say.

Which is best for you depends on you, but I think what you say below should tell you a lot ...

Mart700 wrote: »

Also if the interest rates increase I guess it would change the re-payment and taking the 25 year mortgage and paying extra would be my choice. I could stop the extra payment if money became tight. Where as taking a 18 year I would have no choice on how much I paid each month.

Correct.

I have highlighted was has given away to me what may be where your gut insitinct thoughts lie and your insitinct is often the thing to go with on issues like this.

At the moment most lenders should allow you to extend your term to 25 years if you start off with 18 years and need to change later.

However, the current climate means that it is often unwise to assume that lenders will do something just because they have always done it in the past so it may be better to assume the won't allow you to extend the term at a later date.

Do you have the self discipline to be able to force yourself to make regular overpayments at the 18 year level or do you need that discipline to be forced on you?


How tight is your budget and how easily could the 18 year payment become an issue if rates were to rise by say 2%?

How likely are you to have changes that will mean that the 25 year payment is the most realistic one?

and so on

There are no right or wrong answers, just different strokes ...

Mart700 wrote: »

I know that a fixed rate mortgage will likely come with an early repayment charge. I wasn’t sure if this just applied to paying off the entire mortgage within the fixed term contract or if it also included paying extra each month.

Most fixed rates will allow you to make overpayments. The most common limit is 10% of the balance per year - only if you plan to overpay by more than this should this be an issue and even then there are a couple of lenders who allow unlimited overpayments. Although the headline rate may not be as good you may be able to more than compensate for that if you make overpayments in excess of the 'standard' 10% limit.

Mart700 wrote: »

I guess this is quite a complex issue and I will need to speak to a mortgage advisor but I was wondering if anyone has experience of this and what they know.

A conversation with an adviser would be a good idea even if it's just to help you think through all the issues you need to consider. Ask friends etc for some whole of market brokers they can reccomend.

Do not deal with anyone who approaches you unsolicited offering advice.

Good Luck

dimbo61

Well done for saving a BIG ! deposit and I hope you find your ideal home
Drive a hard bargain in a falling market and check with the lender you want to borrow from how much they will lend you and get a "mortgage in principal " before you go house hunting.
Taking out a mortgage over a shorter term commits you to paying the higher mortgage each month but taking out the mortgage over a longer term and overpaying ( if allowed ) gives you more options if things get tight.
The costs of a new home in the first year espically cannot be understimated.
I like long term fixed deals of 5/10 years as this gives you security of monthly payments and the chance to clear some of the debt ( mortgage ) and increase your equity in the property.