Early repayments, mortgage terms and all that interest

indextwo

Hey guys

So, I had two pivotal ideas infect my brain a few months ago, and haven't been able to shake them; the first was to not have a mortgage, ever. The second was to build my own ideal dream house. I am nothing if not horrifically ambitious.

With regards to the second point (building my own house), I've realised that finding a perfect plot of land is very hard (any tips on where to look, by the way?), and will take some time. With regards to the first point (no mortgage), I'm getting the feeling that my new wife would like a house much sooner rather than later (my no-mortgage saving plan was at least 3-5 years).

So, with my wife's interests at heart I've started tentatively looking at mortgages. What's becoming immediately clear is the sheer amount of money you have to pay back in interest alone (this was the spark that set off my no-mortgage idea). For example, if I'm looking to borrow £190k at a modest 4% over 25 years, the interest alone is around £110k; however, if I look to borrow over 10 years, the interest is much, much lower (around £40k).

I realise that we could get a 25-year mortgage and overpay, but if that was the case, would we still be paying off the £110k worth of interest even if we managed to pay it all within 10 years? I'm pretty sure that answer is 'yes', but I wasn't absolutely certain about it, and I was wondering about alternatives.

The main crux of this is the nature of my business and surges in income. For example this month (April) I've barely had £1000 coming in, but over May/June I'll be have over £30k coming in. That's reasonably extreme, but generally that's what my income flow is like, so it's generally much easier for me to save large sums.

My wife is a civil servant (and as such on a much more regular wage), and the only debts we have are her student loan and a small personal loan which ends this year; no credit card bills, mortgages or car payments.

Any advice, tips, etc. would be greatly appreciated.

TrickyDicky101

indextwo wrote: »

I realise that we could get a 25-year mortgage and overpay, but if that was the case, would we still be paying off the £110k worth of interest even if we managed to pay it all within 10 years? I'm pretty sure that answer is 'yes', but I wasn't absolutely certain about it, and I was wondering about alternatives.

Nope - you pay it off early then you won't have to pay off the full £110k. The interest payable will be calculated on the mortgage balance outstanding, which if you pay it off far faster than a schedule of 25 years implies means that you have lower balances on which interest will be charged (and hence lower interest charges).

The main crux of this is the nature of my business and surges in income. For example this month (April) I've barely had £1000 coming in, but over May/June I'll be have over £30k coming in. That's reasonably extreme, but generally that's what my income flow is like, so it's generally much easier for me to save large sums.

Very likely some form of offset mortgage would be appropriate for you, or at the least a standard repayment one that has no Early Redmeption Charges (ERCs) and will allow completely flexible overpayments.

indextwo

Thanks for the swift response - that's a bit of a relief, actually. So, if I'm understanding you correctly:

The interest payable will be calculated on the mortgage balance outstanding, which if you pay it off far faster than a schedule of 25 years implies means that you have lower balances on which interest will be charged (and hence lower interest charges).

Is this because the compound interest has been reduced on the overall amount due? I'm a real beginner with mortgages (as I said, I was hoping to not have to bother with one), so my knowledge is woefully lacking.

Joe_Bloggs

From what I have read on this forum you may have to prove a regular source of income or have accounts to prove an income stream that makes the mortgage affordable in the eyes of the lender.
Any credit reference agency blemishes are a major hurdle so check your own files first, see here.
Saving for a deposit is another hurdle. The more you have as a percentage of the property value then the better the deal you will get.
J_B.

indextwo

Hi Joe. Yes, I realise all of that. I have more than three years of annual accounts, no credit agency 'blemishes' and a sizeable deposit. Not sure what I said that implied anything to the contrary, but hopefully that's now all clear.

Joe_Bloggs

@indextwo
If you read all the posts on this forum then a long forgotten ,and unwanted, insurance payment made on a 'closed credit' can trash your prospects . Mistakes crop up on credit files creating confusion that can be dealt with if they are just mistakes. This can take some time.

My approach to my mortgage was to build overpayments into my budget. Then to make the total capital repayments each month more than the interest payments with sufficient overpayments.

I was tired of hearing that you only pay interest and no capital in the early years. I endeavoured to make it 50% capital in each monthly payment.

I did not take out mortgage insurance so I felt I had to rapidly build up a buffer of savings that would tide me over a sustained period of unemployment.

The offset suggestion seems like a good idea. Lenders are very 'picky' at the moment and I suspect prefer proven mortgage material rather than newbies. I could be wrong.

J_B.

indextwo

At the behest of my accountant my wife and I both had credit checks run via two different agencies last year (creditExpert and another one whose name I forget) and out credit histories were perfectly clean.

Lenders are very 'picky' at the moment and I suspect prefer proven mortgage material rather than newbies. I could be wrong.

Wouldn't this be true for any first-time buyers? I suppose to an extent it is, although (hopefully) not nearly as bad as it was in 2009.

I'm looking into offset mortgages now to see what I can come up with.

dimbo61

First direct and YBS are both good lenders and with a good deposit you should have the pick of the market.
Barclays also do offset mortgages

spence

dimbo61 wrote: »

First direct and YBS are both good lenders and with a good deposit you should have the pick of the market.
Barclays also do offset mortgages

I agree with the above, especially for best rates. Also look at the one account from RBS. The rates are a good bit higher but have much better flexibility.

thriftychap_2

Someone has posted this: http://spreadsheet.locostfireblade.co.uk/Index.html

Very helpful. I have spent hours on it!!

indextwo

Thanks for the spreadsheet - it looks... immense.

I've been looking at various offset mortgages and quite a lot of them seem to require a 25% deposit which, for the value of houses we're looking at, I'm about £2 - £6k shy of. Although yesterday my wife found a gorgeous looking cottage, but it is in the middle of a terrace (due to 6 years of awfully noisy neighbours through paper-thin walls I've been obsessed getting a detached house) and isn't much bigger (may in fact be slightly smaller) than our current apartment. However, I'd be closer to a 30% mortgage on that place, so not sure if it's worth considering.

I'm going to have a play around with the insane spreadsheet and see what I can come up with.