30 year mortgage - much worse than 25 year?

Manchee

I'm a bit naive when it comes to things like owning property and mortgages and stuff but weve been starting to plan our future a bit recently and set goals (we are currently in rented, would be first time buyers with a 10% deposit). Is it a stupid idea to look to get a 30 year mortgage instead of 25? See our idea is with a 30 year mortgage monthly repayments would be cheaper, but we would over pay and/or save the additional we would have paid for a 25 year mortgage (looking on compare the market/confused.com etc for rough price guide). This would give us some flexibility in the future incase our monthly earnings change (I have written out full budget sheets for many different scenarios including if we have a child, and things would be do-able but very tight for a 25 year mortgage for the size of property we would like).

I think our train of thought is that once we buy we really wouldn't be looking to move for atleast 10 years, ideally never again, so the property needs to fit with our planned future (I know, plans can change..). I know we would pay additional interest over the life of the mortgage with a 30 year, but we would be looking to remortgage after the fixed period (we would be looking for 5 year fix) so could move onto a shorter one and maybe be in a better position as we would have our original deposit, the amount of equity we had built up by that point plus the over payments/savings.

Am I missing anything as to why this isn't a good idea? Would it really be a better idea to look at cheaper places and a slightly smaller 25 year mortgage? Sorry this prob seems a bit of a small/non-question and that I'm over thinking things, but I don't really have anyone else I can ask family wise.

For info, we would be looking to borrow 3.4 times our earnings, thanks.

Jack_Johnson_the_acorn

Manchee wrote: »

I'm a bit naive when it comes to things like owning property and mortgages and stuff but weve been starting to plan our future a bit recently and set goals (we are currently in rented, would be first time buyers with a 10% deposit). Is it a stupid idea to look to get a 30 year mortgage instead of 25? See our idea is with a 30 year mortgage monthly repayments would be cheaper, but we would over pay and/or save the additional we would have paid for a 25 year mortgage (looking on compare the market/confused.com etc for rough price guide). This would give us some flexibility in the future incase our monthly earnings change (I have written out full budget sheets for many different scenarios including if we have a child, and things would be do-able but very tight for a 25 year mortgage for the size of property we would like).

I think our train of thought is that once we buy we really wouldn't be looking to move for atleast 10 years, ideally never again, so the property needs to fit with our planned future (I know, plans can change..). I know we would pay additional interest over the life of the mortgage with a 30 year, but we would be looking to remortgage after the fixed period (we would be looking for 5 year fix) so could move onto a shorter one and maybe be in a better position as we would have our original deposit, the amount of equity we had built up by that point plus the over payments/savings.

Am I missing anything as to why this isn't a good idea? Would it really be a better idea to look at cheaper places and a slightly smaller 25 year mortgage? Sorry this prob seems a bit of a small/non-question and that I'm over thinking things, but I don't really have anyone else I can ask family wise.

For info, we would be looking to borrow 3.4 times our earnings, thanks.

Nothing wrong with a 30 yr mortgage, gives you more options, I specifically took out a 30 year mortgage with the intention of paying the mortgage off in 10 years.... As long as you are financially astute, capable of making overpayments on a regular basis, then I see no issues.

Our reasoning behind the 30yr mortgage = we wanted to keep our payments as low as possible for the first 18months whilst we got married, renovated the house and purchased our furniture.

We are currently on track to have ZERO mortgage in 8years.

Graham_Devon

Theres nothing wrong with a 30 year mortgage if you go in with your eyes open, which you are.

However, the one thing that I've picked up from other threads on the house buying board is that, for many, all those good intentions of paying down the mortgage each month becomes an ideal, stuck in the past.

Afterall, if were all honest with ourselves, upon buying a home we all have wonderful ideas. But once you have it, a year down the line, it's not exciting any more. You've done it. There are other things to want, need, purchase. People will disagree with me, but equally people will agree. The key is simply being aware of other peoples experiences.

I'm not saying people don't overpay, they do, but it takes a lot of will to shovel an extra £100 extra, voluntarily onto the mortgage over and above taking your kids out of treating them....afterall, they are only young once.

One in five new mortgages are now 30 year terms, so you wouldn't be on your own.

As for looking for other places, it really depends on what YOU want and what YOU would be happy with. Never a good trade off to be unhappy in a place simply because it's a bit cheaper.

I'd take a 30 year mortgage. I couldn't trust myself to make the overpayments though. I'd simply go in knowing this and hopefully make "some" payments as and when I could. Therefore, I couldn't PLAN to be at point X by point Y, which it seems you are doing. If you can set up a direct debit from day one and stick to that, then grand.

My idea, by the way, was pretty much the same as yours. Kids came along, the recession hit and everything went out of the window. Long gone are the days when money was our own. These days it's a couple of pairs of decent school shoes and bham, £70-80 gone! I didn't plan for that!

LydiaJ

A few thoughts:

1) There's a lot to be said for buying somewhere that you'll be happy to live for 10 years, rather than buying something smaller and being desperate to move after only a few years. Stamp duty and moving costs are not inconsiderable. You don't need to get your dream house, though, or to do it up to within an inch of its life.

2) Flexibility is great ... unless you haven't got the self discipline to make best use of it. You say you'd try to overpay at the rate you would have needed to pay on a 25 year mortgage. Would you actually stick to that? Only you can know. If you think you really will overpay, then obviously don't get a 5 year fix unless it allows the kind of overpayments you hope to make.

In your position I'd want opt for a house that's big enough to last me 10 years, in a decent area, but then just maintain it rather than do it up, until finances improved. I'd want to get a mortgage with a monthly payment that wasn't too much of a stretch and then set up a standing order for a regular overpayment, as a precaution against rising IRs. I might modify that strategy in light of what mortgage deals were available for different lengths of mortgages, though.

Hope that helps.

kabayiri

Lydia illustrates well why it is just one of the factors.

I would also add that it's beneficial to know your potential buying area well.

There are houses often within a given area which just don't prove easy to sell for any number of reasons. Finding a good house in a neighbourhood which people want to own is important.

I'd say find the right house (or houses), and then work out how the payment plan supports this - be it 25 or 30 years.

Thrugelmir

Manchee wrote: »

Am I missing anything as to why this isn't a good idea?

Five years time interest rates will almost certainly be higher and due to the initial 30 years term you'll have repaid far less of the capital debt owed. 10 years time interest rates may be even higher.

Jack_Johnson_the_acorn

Thrugelmir wrote: »

Five years time interest rates will almost certainly be higher and due to the initial 30 years term you'll have repaid far less of the capital debt owed. 10 years time interest rates may be even higher.

I don't rate Thrugs point, as you'd only end up with a higher payment with a shorter term. when rates do go up, the longer term will allow slightly lower payments, just don't overstretch yourself initially and you should be all right.

Loughton_Monkey

In my experience, the question is totally academic.

I challenge you to find someone who, this year, say, bought a house exactly 30 years ago [or 25 years for that matter] and is still in the same house, never having re-mortgaged, and has therefore just made the very last payment and now has the deeds to the house in his grubby little hands.....

This scenario happens so rarely as to be discounted.

In the very early stages of a mortgage, the interest element of the repayment is identical whether you have a 25 years, 30 years, or even Interest Only mortgage. All the difference relates to how much you choose to pay down each month (or save into a repayment vehicle).

Personally, I've had my own main property on a mortgage for 41 years. I have repaid it basically out of petty cash due to inflation in (a) prices, and (b) my own income over those 41 years. Had I not moved/re-mortgaged several times, I would be sitting in a property worth <£100K even today.

Most people - over their working lifetime - can expect to be earning at least 3 times more at 60-ish than they earned at age 20-ish in real terms. Why not 'use' that increased spending power - at least once or twice during the working life - to readjust the amount invested in your own living accommodation? OK. Moving house comes at a non trivial cost, but it's nothing compared to the increased house equity gains to be made on the more expensive and desirable house.

Put another way, look at the situation backwards.... My first mortgage in 1973 was £6,200. Let's say I chose a 30 year mortgage then. Some 25 years later I would be owing what? £1,500? My earnings would have trebled in real terms. Inflation would have trebled that again, so I'd be earning £20K? I think I'd be paying off the mortgage just to get rid of it by then. But I'd be kicking myself for not having upsized to a better house.

Whether you choose 25 years or 30 years is a choice you must make. Pennies probably do count when you are buying for the first time. But tell me that you are going to sit there for 25 years or more without ever shopping around on mortgage [or utilities, or insurance.....] and I would politely suggest that you probably should avoid making financial decisions.

Just get the best [fixed] mortgage you can, and after the lock-in period, keep shopping around. Preferably end up with an offset mortgage which offers almost infinite flexibility compared to an ordinary repayment.

HAMISH_MCTAVISH

The trend for a small minority of mortgages to extend to 30 year terms is also likely an unintended consequence of stress testing to 7% rates under MMR.

These will be people who could easily afford 25 year mortgages at 5% to 6%, but just fail the super-strict affordability test at 7%.

If they're smart they'll overpay anyway, as they can clearly afford to do so, but I suspect there will be many that won't have the discipline and these affordability tests will only end up making the bankers more profit over longer terms.

LydiaJ

The OP has said they would like to buy a house they'd be happy to stay in for about 10 years, and has said they'd aim to remortgage after 5 years.

The question is whether to stretch to the sort of house they'd really like, but would only be able to afford on a 30 year mortgage, leaving little scope for manoeuvre if IRs go up or their income goes down, or get a smaller place that would be more affordable in the short term but incur the hassle and expense of moving sooner (or risk getting stuck somewhere cramped when kids come along), or buy something they could afford on a 25 year mortgage but get a 30 year mortgage and plan to overpay, giving more flexibility, or ...... (add other options to taste).

I don't think these questions are academic. They are difficult and scary questions for people who've never bought a house or got a mortgage before, and I'm not surprised the OP is trying to get info and opinions from a variety of sources (including us lot) to provide material for their consideration before deciding.

In_For_A_Penny_2

Manchee wrote: »

things would be do-able but very tight for a 25 year mortgage for the size of property we would like

Have you factored in interest rate rises into the equation in case you are over stretching yourself?