25 or 35 yr term? 2 year or 3?

thepedro

My partner and I are first time buyers and are looking to get on the property ladder.

We have found a house about £230k and have a 15% deposit.

We have a few circumstances to consider:

- Parents will sell their house in the next year and have promised us a gift of some of the proceeds. Its unknown when this will be and exactly what it would be, but a good lump sum.

- We'd rather take a fixed rate, not variable.

- Our mortgage advisor (independent) seems quite keen on a 35 yr term, as it would make the monthly payments more manageable. The advisor has fed back to us the following options. 35 yr term, 2yr fixed at 4.64% about £950 a month, 25 yr increases it by about £150 a month.

OR

35 yr, 3yr fixed at 4.99% about £1k a month, 25 yr about £150 more.

He's also discussed an offset mortgage.


Questions:

- What is the best mortgage - should we look for a fixed rate for 2 or 3 years (don't think longer than 3 yr fix would be affordable) - or would an offset mortgage be better given lump sum in the future?

- It seems more obvious to me that fixed 35 yr term, 2 yr deal would be the cheapest and then we can change to the best product in 2yrs and put the lump sum down as a '2nd deposit' to gain more equity at this point.

- Broadly speaking, what percentage of a family's combined take home pay does a mortgage typically make? 1/5 1/4, 1/3, 1/2(!) ?

I'd appreciate any comments or thoughts,

Thanks

Annisele

"What is the best mortgage" - 'fraid that's impossible without a crystal ball. I don't think either of your two options are bad ones.

I'd want a shorter term if at all possible. Assuming interest rates stay the same for 25 years, your 25 year mortgage would cost you a total of 25 * 12 * (£950 + £150) = £330,000. The 35 year version would be 35 * 12 * £950 = £399,000. The saving now could potentially cost you quite a lot overall, and the higher interest rates are the worse the difference between 25 and 35 years gets.

I know that circumstances (and interest rates!) change quite a lot - especially if you're expecting to be able to use a lump sum to reduce the mortgage soon. (I've never quite understood the preference for a mortgage that over a term of x0 or x5 years - I don't see why a 25 year old FTB wouldn't take a 17 year mortgage if the sums stacked up).

I've seen 1/3 quoted in various places - but it really depends. If you don't have children, don't drive, don't take holidays etc you can probably afford rather more; if you're spending £500 a month in petrol you can probably afford rather less.

Thrugelmir

Why not buy what you can comfortably afford now. On the basis of a 25 year mortgage. When you actually get the lump sum in the future reconsider your options then.

Xbigman

Interest rates could rise a lot. Having a lower option could be good. Why not take the 35 year option but overpay the difference each month. You could always stop the overpayment if things become tight.
If you do get a lump sum then just use as much of it as you like to reduce the mortgage but don't forget there would be a penalty for paying a lump sum overpayment during the tied in period.

Whether to take a 2 or 3 year fix is entirely up to you but interest rates are rising so a big factor in deciding would be what the follow-on rate will be.



X

geoffky

35 year mortgage...what next..a fifty year one...the banks must be rubbing their hands in glee.Some sense will return to the market one day..

hcb42

I think 35 year mortgages are a mistake as well. granted I appreciate they bring the monthly payments down, but it is one heck of a long time to have a noose around your neck, and in two years you will barely have paid any capital off. I would go for the 25 yr everytime,and if and when you remortgage in the future, try not to extend the term. Of course that depends what life throws at you in the meantime!

Crashandburn

Another reason for the 35 year term maybe because it doesn't fit the lenders criteria on a shorter term.

Ask if the recommendation of 35 years is being made based on his perception of your ability to make the payments or just to fit the lenders criteria ie Abbey will lend more if a longer term etc. Some terms are decided by the lenders requirements though you can use the overpayment allowance to in effect pay the mortgage of 25 years as first required.

dimbo61

Have you looked at Yorkshire Building Society fixed offset deals with "friends and family" linked offset accounts.
They have 85% LTV deals and your parents could offset some of your mortgage with there savings and you could use any money they "gift" you to also offset the mortgage.
Take the term over 25 year and you will have cleared some of the debt off in 3/5 years
Only my views GOOD LUCK

rndb

I dont quite know why everyone is against a term of 35 years.
If it reduces the monthly payment and makes it AFFORDABLE then why not? Yes you pay more in the long run but a) he will be getting a lump sum to pay some capital off b) you can make overpayments every month, if circumstances permit, to reduce total amount borrowed c) who stays with the same mortgage for full term anyway?
chances are you will remortgage when initial term is up so you can reduce the term then. Hopefully, financial circumstances will allow greater payments per month then.