What type of mortgage and term?

milek

Hello,
Recently I seen a mortgage adviser (more like a broker, not from a specific bank for instance) in regards to getting a mortgage sorted for first home,

First of all, we decided what type of mortgage would be best, could anyone give there opinion on what would be best for us (more opinions we get the better).

We are both trainee workers so on minimum wages at the moment and will be for no longer than a year, (so when qualified, our net income per annum should increase by approximately £5000) which would effectively be an extra £400 or so a month towards the mortgage payment.

So basically, we need a mortgage which we can pay £500 a month on and in no more than a year we will be able to pay £900 odd a month instead (but wouldnt want to pay extra as "overpayments" as that costs us even more in the long run in a way). Is there a mortgage where we can pay £500 a month for a year then change to £900 a month (and be cost effective to us at the same time rather than making "over-payments" of £400 a month).

The adviser said a Repayment Fixed Term 2/3year mortgage would probably suit us best.

Then, We was going through term lengths etc, We again said we could afford £500 a month for mortgage payments at the time being. The adviser selected a term of 35 years for the mortgage on a £80,000 house with a 18% deposit. which brought up mortgages where the monthly repayment was £250-300. I asked, why is the term so long when we can afford £500 a month (where the term would of course be shorter) in which he responded that it works out cheaper. Can anybody please clarify that it is cheaper for us in the long run to pay the mortgage off on a shorter term (which would make sense)?

Any help would be great, totally lost!

milek

Bump :beer:

ch3101

How does making £400 overpayment every month cost you more?

Get a new broker if you're not happy with the current one.

pjread

Personally, I'd agree with your broker if you're at a high LTV and anticipate to be overpaying (i.e. look at 2-3 year fixes). Hopefully you'll be able to lower the LTV by the end of that, and you'd have to be really unlucky to be in a worse position at the end of it (though never say never, plan for the worst, etc!)

Why do you think overpaying will be more expensive than a shorter term? Most mainstream mortgages are fine with overpaying as long as you don't want to pay >10% of capital per annum within the fix.

leccyblue

Sounds like you haven't got a very good broker! Increasing your term (and actually sticking to that increased term) may decrease your monthly payment but it WILL NOT save you money if you stick to the increased term - because you pay less off the capital balance each month - and therefore more interest! The difference between a 35 year and a 25 year term on an £80,000 mortgage will mean you pay back an extra £15,500!!

I would take out a suitable mortage, over whatever term it takes to fall within your £500 a month budget. A 2 or 3 year fix will be ideal as by that time you might be in a better LTV bracket, and may be able to switch products to a better LTV.

And then when you get your pay rises, just make overpayments each month of £400. Most fixed rate deals allow 10% overpayments per year (so £8,000 a year / £666 a month on an 80k mortgage). This will reduce the capital balance of your mortgage, and will reduce your term as long as you keep your normal payment of £500.

This way, you are still shortening your term, however you aren't committed every month to the increased repayment. If, your car needed £400 of repairs and you had no money to cover it, you'd just pay your £500 mortgage payment and make no overpayment that month.

You can see the difference overpayments make using the calculator here

http://www.moneysavingexpert.com/mortgages/mortgage-overpayment-calculator

amnblog

Your broker is probably making the suggestion based on what the lenders decide you can afford per month. Not what you think you can afford (ie £500).

If you are not sure ask him/her

milek

Hello,
Thanks for all the responses,
I came to the conclusion that the broker did not explain the lengthier term very well, I suppose what he was trying to say is that it will be cheaper PER MONTH but not in the long run even though thats not what he actually said.

In regards to the over-payments, I knew there was free over-payments with most lenders for up to 10% but I thought that was per monthly payment, eg if monthly payment is 500, i could pay £550 which is 10% on top, however, that is not correct and I realise after it being explained, I understand that you can actually overpay alot more without exceeding the 10% limit.

We have filled an income and expenses form for budgeting for him to review properly next meeting, then he will see about what kind of term we're actually looking at, I guess he didn't take my word for it for £500 a month as such and wanted me to show him.

Thanks again, you have all been at great help :cool: