Concerns about 37 year term

waterman3

Hi,

I've just read MSE's book "The three most important lessons...." and he talks about the fact that you pay more the longer the term of your loan is.

Just a bit concerned as my mortgage is 37 years, although i am getting quite a good rate at the moment (3.5%) standard variable.

As i'm single, i felt i needed low monthly repayments but now think i could afford a bit more each month.

I'll definitely be selling the flat and moving on well before the 37 term is up! (hopefully in 5-10 years). Just not sure if i should reduce the term or if that's even possible.

Thanks for any comments.

opinions4u

Who's the mortgage with? I'm guessing Halifax with a 3.5% SVR.

You could ask them to amend the term - I believe there's no fee for doing so.

If it was me I'd use this caclulator to work out what monthly payments should be over a particular term. This other calculator can help you work out what your debt will drop to at particular points in time which should also be helpful.

Halifax won't charge for overpayments if you're on their SVR. Check that your lender is the same.

If you can afford to overpay/reduce the term, you should do it (unless you have other credit outstanding that costs you more to maintain, or haven't yet built up a contingency fund of 3-6 months net pay).

Hope that helps.

Joe_Bloggs

If you have money in reserve for emergencies and no other debt at a higher interest then consider researching your overpayment options with your existing mortgage deal. Overpayments can be treated by the lender so that the term of the mortgage is reduced each month . The lender can alternatively reduce the monthly repayment each month. If you fall foul of Early Repayment Charges (ERC) then it may have been a waste of money.
MSE Martin has a comprehensive treatment of the topic here.
J_B.

CloudCuckooLand

Once upon a time the normal length of a mortgage was 25 years.

On such a basis;

- 3.5% on £100,000 = £506 a month repayment, or £292 interest only, over 25 years.
A total of £151,800 paid on repayment, or £87600 and still owing the original £100k, on interest only.


On your 37-year basis;

- 3.5% on £100,000 = £405 a month repayment, or £292 interest only (still, naturally), over 37 years. A total of £179820 on repayment, or £129684 and still owing the original £100k, on interest only.

So, either £28020 or £42084 more expensive, depending on whether repayment or interest only...per £100k.


Being on SVR you could remortgage to a different term as you remortgage your rate. If you overpay the saving you have made from dropping onto the SVR from the higher Fixed rate, then you will in time eat away the capital and/or be able to reduce the term. Your Lender's policy/terms will need to be borne in mind, of course.

waterman3

The mortgage is with Halifax and it is the SVR, you're right. I have no debts (apart from mortgage) and have substantial savings in ISAs and savings accounts.

I normally prefer to save money rather than overpay the mortgage but it's something to think about.

As far as i understand , you can overpay whatever you like on the SVR without incurring penalties.

or may just ask them to reduce the term. Decisions decisions :rotfl:

waterman3

interesting stuff!

The mortgage is only 60k (£56,500 remaining) as it's a shared equity scheme and i own 60% of the property).

I suppose if i overpay the mortgage each month i'd save alot more interest than i would currently make in an isa!

Joe_Bloggs

I am probably going to cross post with opinions4u for about the third time this evening. You do not have to make any decisions about what the future term will be if you make an overpayment or regular overpayments and they are treated as reducing the term. Thus overpayments with this treatment reduce the term but these overpayments are not an essential part of the mortgage repayment.

If you formally request to reduce the term of the mortgage then you will have to pay a higher regular payment that matches your old regular payment plus your regular overpayment each month to keep on the same repayment rate for the reduced term you chose. Thus it can be more of a financial burden and less forgiving.
J_B.

LilacPixie

If it was me I would be overpaying whatever you can afford. My understanding is each overpayment naturally reduces the term by lowering the amount of interest due. It this way you have not commited yourself to a set higher payment and still have a great deal of flexibility.

If you like to save in the 'regular' way how about 50/50 half to mortgage half to accessable savings. TBH unless your savings are yeilding more than 3.5% net then you are financially better to be overpaying once you have saved a decent cushion of cash (I opt for 6 months salary)

waterman3

I had decided to make overpayments in order to reduce the term. Then i read an article on the subject.

The MSE's advice is that you should use up your ISA allowance first before overpaying your mortgage.

It would take me all year to save up the £5,100 ISA allowance so i'd have no time left to put money away into overpayments.

Am still a bit confused about what the best thing is.

VIGILANT22

Why dont you speak to adviser, the generic information on here is good..however when it comes down to personal finance a 1-1 with an adviser who would do a review of your finances would possibly be reassuring..

Mips

waterman3 wrote: »

The mortgage is with Halifax and it is the SVR, you're right. I have no debts (apart from mortgage) and have substantial savings in ISAs and savings accounts.

I normally prefer to save money rather than overpay the mortgage but it's something to think about.

As far as i understand , you can overpay whatever you like on the SVR without incurring penalties.

or may just ask them to reduce the term. Decisions decisions :rotfl:

Making large overpayments on the mortgage will save you thousands - this could be the biggest saving you make in your life.

If you can afford to do it. You would be mental not to