How to approach a mortgage with a high savings rate?

bourbon_biscuit

Hi,
I am a long term MSE browser and have a question I am struggling to find a good answer to.

Our situation is as follows:
36k net income
12k outgoings
Savings rate: 66% (or 24k P.A)

We are renting a property and the current plan is to save up for a deposit over the next 2 years, buying shortly after our lifetime ISAs mature to claim over 6k in bonuses between us.

As it stands, we would have around 60k deposit on a house. Looking at the properties in our area, 150k is a good budget for a house (60% LTV). Delays to our house buying may increase our budget with the same LTV as savings accumulate, but lets assume 150k.

Given an outline of our financial situation, what would MSE recommend in terms of mortgages?

I have come up with the following options myself:
5 year mortage, race to the finish, risky should we lose a job
10 year mortage with free early repayments, race to the finish and affordable if we lost a job
25+ year mortgage, beat the rate by saving full ISA allowance in stocks and shares ISA with (i think the allowance would be over 40k between us by then)

Which makes the most sense? Is a 25 year mortage going to be an annual source of headaches? Is rushing to pay off a mortage going to make us significantly less wealthy?

Thank you for your time

Makkusu

I personally believe in taking the maximum term loan just so to have the flexibility of repayment. Mortgage rates are so low you're bette off building large savings, and then each year deciding what you'd like to pay off as lump sums... It works out the same no matter what length you tie in for, should the overpayments work out the same. Use some repayment calculators and play about with the figures to understand.

Second, 5 years is slightly unrealistic to pay £90k mortgage back, factor in interest and other costs.

Third, 10 years is also unrealistic if you lost 1 job. Have you factored in lifestyle changes I.e. Children? Safety budget? Buffer money?

Lastly, S&S ISA you'd need to have a good mind on how to invest the funds yourself, as you may know, factor in potential depreciation of equity/trust funds for potential loss of money and whether you are happy with that. This is more advisable than and safe of an option imo...if you know what you're doing.

Thrugelmir

Find a mortgage which allows overpayments to be made. Maintain flexibility.

amnblog

Point 1.

Affordability calculations may be a barrier to 5 or 10 year terms.

Point 2.

A 25 year term is not set in stone as most products come with the option to overpay by up to 10% of the balance per annum. Making a resulting sub 10 year term possible by definition.

acha114

Sorry to hijack the thread but it seems quite similar to my case....

We have a deposit sufficient enough that the loan-to-value is 75%. Over a 30 year term and an 5-year fixed rate of 2.24%, our repayments will be around £80 less than our current rental payments per month. We will have enough money left over for other things.

I am thinking whether to increase the deposit to meet the loan-to-value of 70%. The interest rate won't change (the next change in interest rate is 1.99% at 65% LTV, which is way above what we can afford), but our monthly repayments will be lower - it just means we have less cash available to us right now, but we will save on the monthly repayments over time.

What would be the best way to approach this in the current environment?

amnblog

It's a matter for you.

Some people live with debt because availability of cash is king.

Some prefer lower debt and less cash.

bourbon_biscuit

amnblog wrote: »

Point 1.

Affordability calculations may be a barrier to 5 or 10 year terms.

Point 2.

A 25 year term is not set in stone as most products come with the option to overpay by up to 10% of the balance per annum. Making a resulting sub 10 year term possible by definition.

This is useful information. With the average uk household savings rate currently below 4% with a peak in 2010 of 12% I can see why we may be gated by affordability calculators.

At our conservative rate of 66% (actual 70%+), we could comfortably pay off the mortage in 5 years with at least 25k to spare.

My actual question/theory is as follows:
While mortgage rates are below 5%, it is significantly more profitable to put savings into a S+S ISA than the mortage (given the widely assumed average return of 6-7% with a well managed diverse portfolio)
Is this a strategy used by any others here at MSE? From this perspective, it makes sense to get the absolute maximum mortage term with no early repayment fees, to be able to invest the maximum while mortage rates are low and plough into the mortage balance if/when the rate exceeds 5%.

Makkusu

Yes, simple math is to compare % return to % cost and make decision based on that.

Added bonus is you have extra reserves to fall back on.