Mortage term - 20 or 30 years?

audigex

I'm looking at my first mortgage, and am in the fortunate position that it's looking very manageable: but I don't fully understand the tradeoff between different term lengths, particularly when overpaying above the minimum payment.

My repayments are looking to be currently somewhere between £340 (30 year term) and £430 (20 year term) per month. This is on a lower mortgage than I was initially expecting, and the lender was previously happy to lend me ~30% more on the same income, with repayments of £600 (and likely overpaying to £700) on a 20 year term.

Essentially, then, I'm looking at borrowing £340-440, when I am able to afford £600-700

So the obvious solution here is to over-pay, giving myself the option of reducing the payments if I'm a little short, absorbing any rate changes, but paying the mortgage off much faster than the term would suggest. Both terms would allow me to do this, but I'm unsure how far to take it

My understanding is that if I pay off £700 per month, the mortgage will be paid off on the same date regardless of the initial term? So is there any advantage to taking a 20 year term over a 30 year term?

As far as I can tell, a 30 year term would allow me more flexibility with my finances (I can halve my payment in any given month and have £350 available), and allow me more time to get a job if I lost my current position... so what would the advantage of a 20 term be if overpaying? I understand that if paying the minimum payment, the 20 year term means less interest overall, but if paying off in more like 15-17 years anyway (realistically), is there really much difference?

I feel like I must be missing something obvious, because I can't see the downside to the 30 year term?

Other info:
I'm 25, loan to value is around 70-75%, and the mortgage payment (even overpaid) should leave me comfortably able to pay bills and have a little spare for socialising, treats etc: although I wouldn't be splurging on huge holidays etc.

Rollinghills

In many ways a longer term is better for the reasons you described.

The only 'negatives' could be
- you have to be committed to overpaying (some people don't have the discipline)

-regular overpayments can be difficult to manage if your lender insists on adjusting your direct debit downwards frequently due to your lower balance. I think this depends on the lender though.

But you may be making overpayments even with the 20 year term so those factors may apply anyway. I'd probably go for 25-30 years for the extra flexibility.

NorthernMonkey1

I've recently had to make the same decision as you. Based on the payments I would like to make, I can afford a 14 year repayment, but I have chosen an 18 year repayment schedule in order to allow more flexibility if required

goodwithsaving

I'd do a longer term (that's what we did). We went for 35 years and by overpaying just £100/month, it brings it down to 27 years or so but we aren't committed to overpaying. The shorter term committed us to higher repayments. We wanted the flexibility.
Just watch you don't overpay more than the permitted amount.

audigex

Thanks, I just presumed there had to be a catch - hitting the overpayment limit shouldn't be a problem in day to day life, as even over paying I wouldn't hit the 10% overpayment permitted per year - although it's something to perhaps bear in mind if I have a windfall.

Currently the only way I'd be likely to hit the limit is if I got a job locally and could free up some cash from my car, or inherited money (highly unlikely). I can even funnel work bonuses in and still be under the limit I believe. At the end of the day if it's a one off I can just wait until the next year or take the early repayment charge, as I'm not likely to do it more than once or twice

Thanks looks like 25 or 30 years is the way to go

stator

Yes I am in the same boat. Could afford a 20/25 year mortgage but will probably chose a 30 year mortgage just in case to keep the mortgage payments low and try to overpay

pinkteapot

Agree with everyone else - if you have the commitment to overpay, there's no reason not to take a longer term. We got the longest term we could (28 years) but aim to pay it off in 14 years. :money:

We think of our standard monthly repayment as being like the 'minimum amount due' on a credit card.

getmore4less

How is the emergency/loss of income fund looking?

JimmyTheWig

audigex wrote: »

My understanding is that if I pay off £700 per month, the mortgage will be paid off on the same date regardless of the initial term?

Correct.

As far as I can tell, a 30 year term would allow me more flexibility with my finances (I can halve my payment in any given month and have £350 available)

And this is exactly the downside of the 30 year term as well.
If you don't have enough self-discipline you could easily convince yourself that this month you needed extra for this and next month you need extra for that.

Doesn't sound like you'll fall into that trap, so given you'll be within overpayment limits then no reason not to go for the 30 year term.

audigex

So it sounds like there is a downside... self discipline. I'm determined to overpay the mortgage. It's possible I won't have the willpower to do it 100% of the time, but I do have a drive to be mortgage free so I think I should be ok.

I think in my "Mortgage free date" calculations I'm going start with a goal of overpaying every month but a realistic estimate of somewhere between 6 and 9 overpayments per year and work off that basis: I expect to mess up sometimes, but as long as I go into it with realistic expectations of what I can actually do personally and financially, it should work out. I figure if it sounds sensible at 9 overpayments per year and survivable at 6, I'm in good territory

getmore4less wrote: »

How is the emergency/loss of income fund looking?

Pretty good: I'd struggle with a huge repair bill like a new roof, but I could absorb a damaged window or door or more moderate repair.

I expect my emergency fund to be roughly £3-5k immediately after buying the house - I have roughly £16k in savings currently, of which around £10-12k will be going into the house as deposit. I also have a car worth ~£15k from which I could free up £10-15k fairly quickly if needed.

If I lost my job I'd have loss of income insurance (fairly cheap at my age, which I fully intend to take advantage of), but assuming that didn't pay out for some reason:

1) That £3-5k would sustain me for 3-6 months of job hunting, in terms of mortgage/bills/food. Potentially longer if I'm frugal.
2) I could sell the car, as I wouldn't need it when not working. That would give me an additional 10-18 months if needed. Obviously the later this happened the less I'd get for the car.

So I'm looking at 1-2 years before I ran out of non-house assets: but I've got family I could turn to if needed

If I just needed the money for emergency house repairs or similar while still employed, I'd have that £3-5k available immediately, but I would also be able to pay roughly £800 per month from my salary in an emergency while still making minimum payments on everything important. So that's a £4-6k emergency fund, in addition to which I could borrow some from family if needed. I could also potentially free up some of the value of the car and put up with a less comfortable commute and the risk of it being less reliable, but I should be able to get an extra £5k there fairly quickly if needed.

My plan would be to put a couple of hundred away for the first 9-15 months (with another couple of hundred going into overpayments) to increase that emergency fund to at least 5-6k, after which I'd swap to putting everything spare into overpayments, reducing it again to top up the emergency fund if I have to dip in for a repair

The house is in pretty good condition structurally and although it needs a little TLC inside, there's nothing excessively urgent or unmanageable - a few licks of paint, a carpet and perhaps a window. The biggest job would be a new kitchen, but a significant chunk of that will come out of a potential bonus from work (if I get it) or could otherwise wait until I can afford it. There's nothing that can't wait until I can afford it.

audigex

A double post, but since it's a completely different topic I guess it's ok?

Having spoken to the mortgage advisor, it sounds like they'd struggle to justify a 30 year term with the lender/underwriter, as I'm already very capable of meeting the monthly payment with even the 20 year term, never mind the 25 year (on the 25 year term I expect to be able to roughly double the payment).

It looks like it would only save me £30 a month, though, so I think they're probably right that it could be expensive in the long run for little real flexibility gain now. 25 years is probably the best compromise for me personally, then, giving me a little extra cash availability now without excessive extra interest if my overpayment plan doesn't work out.