Shorter Term Vs. Longer Term

SilverSix

This is a bit theoretical but I just want to check I'm not missing anything.

The longer the mortgage term then the more you'll end up repaying in total. However the lower the monthly repayments compared to that same mortgage with a 10/15 year shorter term.

With a mortgage with no ERC's providing you plan to over pay and clear the mortgage early (and any charges for doing so) then increasing the term would lower your monthly payment and due to this actually allow you to overpay the mortgage more each month and as a result quicker in total.

Have I missed anything? or is there something I'm not considering?

BennyC

TrickyDicky

Assuming both products had the same interest rate, if you made the same payment to both, they would end up costing the same.

Example. £100k at 4% over 25 or 35 years.

25 years, monthly payment is £527.84
35 year, monthly payment is £442.77. Overpay by £85.07/month (to make it the same as 25 year repayment), mortgage payed off in 25 years.

blueberrypie

BennyC wrote: »

With a mortgage with no ERC's providing you plan to over pay and clear the mortgage early (and any charges for doing so) then increasing the term would lower your monthly payment and due to this actually allow you to overpay the mortgage more each month and as a result quicker in total.

Have I missed anything? or is there something I'm not considering?

I think you might be thinking that overpaying has a greater effect than just "paying"?

If lengthening the term reduces your monthly payment by £100, and you use that £100 to overpay each month, you're in exactly the same position as if you'd taken the shorter term (and higher payment) in the first place. The effect on your mortgage balance each month will be exactly the same as if you'd had the shorter term.

SilverSix

blueberrypie wrote: »

If lengthening the term reduces your monthly payment by £100, and you use that £100 to overpay each month, you're in exactly the same position as if you'd taken the shorter term (and higher payment) in the first place. The effect on your mortgage balance each month will be exactly the same as if you'd had the shorter term.

Thanks.

Though it does give you some flexability should you ever be a bit tight for cash to over pay, that you can still afford the regular payment. Not overpaying for a few months would obviously mean you repay more in total unless you made up for this by larger overpayments for a few months to follow once cash flow picks up again.

Basically even though you're paying back the same on either length term the required amount on the longer term is lower which could be suitable if some months you might not be able to afford to repay the full amount (requirement + overpayment) but just the requirement.

teameffort

Some banks also place a limit to how much you can over pay each month, so you'll need to research it if over payments part of your plan.

i can think of one bank that allows you to over pay by 20% whilst another allows you to pay in an extra £500 a month maximum, this makes a big difference.

Thrugelmir

BennyC wrote: »

Though it does give you some flexability should you ever be a bit tight for cash to over pay, that you can still afford the regular payment. Not overpaying for a few months would obviously mean you repay more in total unless you made up for this by larger overpayments for a few months to follow once cash flow picks up again.

If you believe cash will be tight. Then you are stretching yourself in terms of affordability.

On a 35 year term mortgage. You would still owe around 30% of the capital balance after 30 years.

Mortgages are back loaded in that the last 10 years you'll repay the majority of the capital balance. So the shorter term the better.

Better to borrow less initially and build equity up in the property, before moving upwards.

SilverSix

The reason I ask/think this is because some of my capital is coming from investment bonds which I'm in the process of surrendering. I'm in contact with my solictor but the total amount/amount after tax still isn't quite clear yet but I have a figure which is subject to getting them out in the tax year and using up allowances etc. So the amount I may need to borrow might be a little more than I've budgeted for.

The mortgage is only £40,000 with a LTV of 15% so repayments are small and my salary is around £22,000. I can actually repay £5000 of that immeditely if surrendering my bonds goes to plan. My estimated outgoings are £930 which will leave me around £430 before any mortgage payment which is between (£160-220 depending on the amount, insurances are calculated in to my other outgoings) I do plan on having lodgers to supplement my income (I have room for 2 and have accounted for tax implications & allowances). however should I find myself without lodgers having the flexability with a smaller required repayment from a longer term is appealing. The AIP & application which is being submitted shortly after valuation this week has no/unlimted ERC's and no early ending fee after 5 years.

It might all seem a bit tight however I do plan on working my way up the salary ladder/ working closer to home to drop my commuting costs and having 2 lodgers will bring in around £6-700 extra per month profit (before tax) so will be more comfortable and will be able to overpay the mortgage more. I'm just covering my bases for the worst should it happen.