The rise of the 40 year mortgage

the_flying_pig

ukcarper wrote: »

My first mortgage in 1972 was 35 years

back in the day when practically all FTBs were in their 20s, 35 years wouldn't have been *too* bad.

40 years however at a time when most FTBs are rather older, well, i mean, it can't possibly make any sense.

Landofwood

HAMISH_MCTAVISH wrote: »

Drivel.

Mortgage affordability under MMR is assessed based on a 25 year term.

If they want to take 40 year mortgages they're idiots.

They could afford 25 years.

But may have to forgo an annual iphone upgrade and the second foreign holiday each year....

Perhaps they took out the 40 year mortgage but then paid equivalent overpayments to reduce the term to 25 years. It's a financially savvy way of being able to fall back onto lower monthly payments should the mortgagee fall on hard times. Of course maintaining the overpayments requires discipline.

Not necessarily idiotic at all.

gazter

ukcarper wrote: »

My first mortgage in 1972 was 35 years

Six shillings a week?

chris_m

gazter wrote: »

Six shillings a week?

30p a week, shirley?
:rotfl:

michaels

wotsthat wrote: »

If they'd invested the payment difference between a 25 & 40 year mortgage in the FTSE between 1975 and 2000 they'd be massively up as long as they sold their investments and paid off the mortgage at the end of 1999! Otherwise they'd just be up.

Having to pay off debt with earned income at 1970's and 1980's tax rates must have been soul destroying.

But they might have been able to invest a larger sum in property with the lower payments from a longer term and of course property investment is geared unlike pension investment.

jamesd

wotsthat wrote: »

I'm hoping I'll have been mortgaged for 44 years by the time I've paid it off with the last 12 years payments being paid out of tax free income. ... I've extended my mortgage to retirement so I can divert capital to a pension that gives a 40% return on day one and 25% of the eventual pot will be free of income tax. It seems so silly paying off debt with interest rates so low. If the sums ever go the other way I'll just pay off a large chunk of mortgage and dramatically reduce the term.

Right. Since investments beat mortgage interest rates normally it's usually the better move to pay interest only or failing that to have the longest possible term. Bonus to have an offset mortgage so at any times where this isn't true you can choose to save the mortgage interest.

At the moment just the tax free lump sum value of my pension pot is 97% of my mortgage balance. Not a penny of that is my own money. Employer matching, tax relief, salary sacrifice NI gain. All adds up.

At the moment on perhaps £8k+ of income I'm getting total reliefs of 58.9%: 40% higher rate income tax, 12% basic rate range employee NI saving and 6.9% employer NI split. This is courtesy of having investment income outside work, via high savings instead of mortgage overpaying. Net cost to me in this range: £48 after income tax and employee NI. Amount in pension: £100 from my own part plus another 6.9% from employer NI addition. So £106.90 in the pension is costing me just that £48 net. An immediate multiplying of my money by 2.227. In a few years I can take out 25% as a tax free lump sum, £26.72. Assuming basic rate tax then the rest is worth £64.14 after tax. So net cost of £48 for net out of £90.86. 1.89 times the money net to net.

And I probably won't actually pay that basic rate income tax. I'll more likely use VCT purchase to eliminate it (and get 30% relief instead of 20% tax paid, making another tax gain) or become resident in Portugal for a while to get their 0% rate on pension income and lump sums.

At the moment I'm doing some P2P investing at 19.5% and more at around 14.5% and 12.5% taxable. And 10% tax free from a VCT. Way above standard or equity release mortgage costs.

michaels wrote: »

But they might have been able to invest a larger sum in property with the lower payments from a longer term and of course property investment is geared unlike pension investment.

That's another of the potential advantages of interest only or longer term, that much more money invested in leveraged property.

Mistermeaner

Don't disagree with any of that, but psychologically I just want my mortgage gone

Spidernick

wotsthat wrote: »

Having to pay off debt with earned income at 1970's and 1980's tax rates must have been soul destroying.

But wouldn't the high inflation at that time have eaten into a lot of the debt, negating that negative?

Spidernick

Just because people take out a 40-year mortgage doesn't mean they're then obliged to hold it for the full 40 years - surely the initial term is largely an arbitrary figure that will change over time?

wotsthat

Spidernick wrote: »

But wouldn't the high inflation at that time have eaten into a lot of the debt, negating that negative?

High tax rates and high inflation? Yes debt is being eroded but it's a mercy of the small variety.