Dumb mortgage length question

bobcratchit

Please excuse this simple question but not really been able to find the answer.

I'm looking to take out a new mortgage but i'm wondering if the length of the mortgage affects how much I will pay in the long run.

For example if i took out a 25 year mortgage of 100,000 and paid it back 5 years earlier, would i still pay for the 5 years off interest that would have accrued if it had run its full course.

Obviously the monthly repayments per month are lower on a 25 year than a 20 year so I was just wondering what the benefits were (if there are any) of taking out a mortgage for a shorter time if one could take out a mortgage for a longer period but have the option of paying it back earlier.

Hope that makes sense!

BitterAndTwisted

The interest on the mortgage isn't calculated and set from the date you take it out. Most mortgages have their interest calculated annually or monthly so paying it off early reduces the total amount of interest charged.

dimbo61

The longer the term of a mortgage the more interest you pay!
But you need a balance
If you borrowed say £100,000 and took a term of 8 years you might have to pay £1000 a month mortgage payment
If you borrowed the same £100,000 over 25 years the payment might be £300 a month ( If you have the spare money every month you could either save into ISA,s or overpay the £700 a month extra)
Both ways would clear the mortgage in 8 years BUT you are not forced to come up with £1000 every single month if you cannot afford it if you take the longer term.

getmore4less

BitterAndTwisted wrote: »

The interest on the mortgage isn't calculated and set from the date you take it out. Most mortgages have their interest calculated annually or monthly so paying it off early reduces the total amount of interest charged.

I suspect many are daily(based on daily balance) with monthly compounding(when the accrued interest gets added to the mortgage).

tiggerkid

If you take out a mortgage over a shorter term, you will save on interest payments but I'd advise you to read through the terms of any mortgage offer you'd get to see if there are any penalties for early redemption. If not clear, ask your mortgage advisor.

kingstreet

If you have a fair degree of discipline, take the mortgage over a longer term and get the lower contractual payment.

Then, overpay voluntarily up to the monthly amount you would have paid for the shorter term you prefer, remaining within any early repayment penalty avoidance limit set by your lender.

If you have an unexpected expense, you can always miss a month and pay the lower contractual minimum. This gets you where you want to go, but without tying you to the higher payment you might not always want, or be able, to afford.

krlyr

Martin has an overpayment calculator that shows how many years and how much interest you save by making one-off or regular overpayments.
http://www.moneysavingexpert.com/mortgages/mortgage-overpayment-calculator

As said, you may find a limit (often 10% of the balance at the beginning of the year) on how much you can overpay your mortgage by, before you're fined. However, remember that you can change your mortage type within those 25 years - one thing we're considering in the future is an offset mortage, where your savings are taken into account, as at our current rate of overpayments we'll be affected by the 10% limit in the future.

Also may be worth reading the "Should I overpay my mortgage" guide too - http://www.moneysavingexpert.com/mortgages/mortgages-vs-savings

bobcratchit

Brilliant! Thankyou you everyone for your responses. Much appreciated.
I'm self employed and so often it's a case of feast or famine and I do try and overpay when I can.
So it seems to be that the best way is to take a 25 year mortgage so that the monthly repayments are as low and when I can, overpay. And of course, taking into consideration early repayment charges.

I wonder therefore why people take out shorter mortgages if there doesn't seem to be any financial benefit of doing so? Or am I being thick?

AFK_Matrix

It is limited by the pension age. So when I went for my mortgage I actually got a 35 year mortgage as I had that long until I was 65. I am going to start overpaying soon so will reduce that length though as suggested earlier. I have also fixed for 5 years so at the end of this term I am going to look at remortgaging and obviously would be limited to a 30 year mortgage because I will be around 35 by then.

pinkteapot

bobcratchit wrote: »

I wonder therefore why people take out shorter mortgages if there doesn't seem to be any financial benefit of doing so? Or am I being thick?

1. Most mortgages must finish before you reach pension age (around 65, depending on lender).

2. Some people don't trust themselves to make overpayments.

3. Some people prefer the psychological effect of knowing it's shorter. If they can comfortably afford the repayments, why not?

We're doing the same as you. We're taking out our mortgage over 28 years (max we can until MrTeapot is 65) so that the minimum repayment is as low as possible. But our product has unlimited overpayments from the outset so, whenever possible, we'll overpay.

This will give us as much flexibility as possible as we're hoping to have kids soon.

On our current mortgage, our overpayments have reduced the interest we'd pay over the life by £12k so far. :money:

If you have a play with overpayment calculators you'll see that if interest rates are higher in the future (which they will inevitably be), the savings that overpayments generate are even bigger.

Kynthia

bobcratchit wrote: »

I wonder therefore why people take out shorter mortgages if there doesn't seem to be any financial benefit of doing so? Or am I being thick?

As well as pension age, some people know they aren't disciplined enough to make overpayments if they don't have to, or they would want to exceed the 10% limit for overpayments or the product they get makes overpaying a hassle (only by cheque posted to a certain address for a minimum of £500 at a time).