35 year mortgage then switch to 25 year

dan_ord

Hello,

Me and my girlfriend are in the process of getting our first house.

Were looking at a 90% mortgage (10% deposit) with Abbey.

We've spoken to a mortgage advisor who suggested that we take out a 35 year mortgage (fixed for 2 years) @ 6.19% which the repayments are roughly £651 a month which reverts back to a SVR of 4-5% at the time of writing.

Initially we were wanting to go with the 25 year instead for obvious reasons, but with repayments of £733 again approx - can't remember off the top of my head.

What the advisor said was go for the 35yr and then after the 2 years remortgage to a shorter term. i.e 25 years, which is definately appealing with the lower repayments.

My questions are:

A: Would you recommend this?
B: If after 2 years we remortgage to a 25 year, won't the repayments go up, if not be the same as they were on the 35yr? Because we won't have paid much off the mortgage anyway, it's mostly interest in the first couple of years isn't it?

Obviously there are early repayments fees etc to take into account when remortgaging so wether or not its worth it also come into question.

Should we just go for the 25yr and cough up the extra money (things would be tight, but not unmanageable) or do what the advisor recommends and go for a 30/35 year and switch after 2?

Any sort of advice would be greatly appreciated!

Cheers,

Dan.

shortchanged_2

Firstly is that the best deal you can get, because I've seen HSBC (although apparently very picky), Co-operative and Nationwide offering rates of 5.89% for 2 year fixes. Co-op are even offering a 3 year fixed at 5.89% fee free with a 10% deposit.

Do you have any problems with your credit history?

CloudCuckooLand

A) Probably not.
Yes, the payments will go up. Pretty much to the £733 figure...in two years time a 4-5% SVR could be above 6%...

The idea is that for "youngsters", it should be ok as they should progress in their careers and be able to afford more in a couple of years. It was done back in the day of endowments, with "low start" products...

The problem is, if you get used to paying X, it will become harder to pay Y, if other things in life get in the way...like kids, a bigger house, higher interest rates, etc...

The figures you are being offered are at a time of 300-year historically low base rates...which can only go up. So SVRs and new products rates are likely to be higher in two years...

And then's there's the possibility that house prices will fall in the next two years, leaving you stuck between 90% and 100% LTV, and unable to remortgage anyway - stuck with the SVR - check whether its 4% or 5%. If 5%, base could easily go up 2% in two years, making rate you pay 7%...

Personally, I'd lean towards a product of longer than 2 years, and make sure I'd plenty of spare cash behind me to improve the LTV if needed...

blueberrypie

The mortgage advisor was probably thinking that you would keep the payments lower at the beginning when you might have higher expenses. The payments would indeed go up if you were to later remortgage to a shorter term. Early repayment fees generally only apply during the fixed-rate part of the mortgage, so you don't need to be concerned about that unless you plan to remortgage sooner than two years. However there might well be other costs, such as application fees etc.

My main concern would be that in two years time mortgage rates could be considerably higher than they are now, at a time when you'd be going onto SVR or remortgaging. If you want the security of a fixed rate, it might be worth looking at longer fixes.

Was the advisor you spoke to an independent advisor? If he works for a bank, you need to realise that he is a salesperson, not an advisor, and his job is to sell that particular bank's products. There may well be far better options for you available elsewhere.

JSR

Why is the advisor suggesting 35 years rather than 25? Perhaps because of their affordability criteria. Would they actually lend to you with a 25 year term?

What about overpayments? You can usually overpay a certain amount every year without penalty. Normally 10% of balance or 10% of original loan. So if you liked you could take out a 35 year term and then overpay to make up to a 25 year term or even less! Whatever you can afford within the limits.

P.S. As others say there are better 90% deals.. Notts BS have 3 year fix at 5.49% and 5 year fix at 5.69% for 90% LTV both with only £195 fee and free valuation.

beecher2

My concern would be that your LTV may be over 90% by the time you come to the end of your deal - especially with you paying back so little since the term is long. Then you'd be stuck on the SVR with very little option.

If finances are tight at £733, what provision do you have if rates increase? Would a cheaper property not be a better option than increasing the term?

dan_ord

Hi,

Thanks for the replies so far. The mortgage advisor has emailed me over the quotes. @blueberrypie - yes she is independant

The SVR rate is currently at 4.24%

We are in quite a sticky situation with the mortages, i forgot to mention that 5% of the 10% deposit has been gifted from the housebuilder, which apparently makes the lenders very funny, so quite a niche market.

Were currently renting at the moment and for obvious reasons want to stop throwing away money. The way we were looking at it was if we save up the 10% ourselves, were gonna be in roughly the same position now as we would be in say 1 years time, plus with the possibility of the rates going up anyway.

If we went for the 25yr, we wouldn't really have any money left over to do overpayments and inprove the LTV.

At the moment im beginning to think we should just try save up a 15% deposit and go from there, bit of a nightmare really, need a lottery win or something!

Dan.

beecher2

I agree that saving up a bigger deposit might be the best bet. I don't see renting as throwing away money - it is paying for a roof over your head. You could go onto the Debt Free Wannabee forums for help in building up your deposit - there's great help over there.

shortchanged_2

dan_ord wrote: »

Hi,

We are in quite a sticky situation with the mortages, i forgot to mention that 5% of the 10% deposit has been gifted from the housebuilder, which apparently makes the lenders very funny, so quite a niche market.

/QUOTE]

Personally then I would avoid it like the plague.

CloudCuckooLand

Renting is not throwing money away, any more than borrowing money from the bank and paying interest on it, is throwing money away...

It gets you a service - a roof over your head. Unless you want to go back to the parents..?

If you have only saved 5% yourself, you should stop and think hard about proceeding. Its not like you have leeway should rates shoot up. Or a child arrive...

15% deposit is defintely a better idea. Then tell the developer to knock his 5% "gifted" deposit off the asking price...

Even 10% deposit (all your own) will help you get a wider range of lenders, and access to those better deals that have been mentioned.

The difference you quote, about £80 a month is peanuts anyway...you need more of a cushion in that in your finances...do an SOA (statement of affairs), see where you can improve your financial position.

dan_ord

Thanks for all the advice so far, beecher thanks i'll check them out.

I'll re-ittrate what i said about renting lol - We've got a decent place at a very decent price, would just like to be able to do what we want etc without having the ties etc, but i guess thats what comes with renting!

I kinda knew before posting on here that we were in a difficult situation, but the advice you've given me has reassured me completely - we need to save up more, there's no point buying given our circumstances and the inevitable rate hike.

The hard part is telling our lass that we shouldn't go for it (any suggestions are welcome haha!)

Again thanks for the advice, much appreciated!

Cheers Dan.