25 year vs 35 year mortgage confusion

nev87

Hi all,
I am trying to better understand the difference between 25 and 35 year mortgages and I think I must be misunderstanding something. Some hypothetical numbers:

With 2.64% fixed for 2 years with repayment over 35 years - over the first two years I would have repaid £12,984.00 with repayments totalling £31,752.00 (£1323 per month). So borrowing the money for two years will have cost me £18,804

With 2.64% fixed for 2 years with repayment over 25 years - over the first two years I would have repaid £21,039.00 with repayments totalling £39,648 (£1652 per month). So borrowing the money for two years will have cost me £18,809

So would it only cost me £195 more to borrow on the 35 year option over the course of two years, after that I'd negotiate a new mortgage rate and term. I've read that it's better to have a 25 year mortgage if possible as you pay back sooner, however these calculations seem to show that the 35 year option is better over the first two years and would mean I have £329 spare per month (which I could put into savings meaning I'd save £7,896 over two years).

So why would I choose a 25 year mortgage if it costs me only £195 less and I'd lose out on the opportunity to put £7,896 into savings?

Figure I'm missing something!

Thanks!

amnblog

Because you are paying the mortgage for 10 years less overall, with 10 years less interest.

ACG

You have not said how much you plan on lending initially.
Take a look at this site, it will tell work it out for you - http://www.amortization-calc.com (just imagine it is a pound sign rather than USD).

zagfles

nev87 wrote: »

Hi all,
I am trying to better understand the difference between 25 and 35 year mortgages and I think I must be misunderstanding something. Some hypothetical numbers:

With 2.64% fixed for 2 years with repayment over 35 years - over the first two years I would have repaid £12,984.00 with repayments totalling £31,752.00 (£1323 per month). So borrowing the money for two years will have cost me £18,804

With 2.64% fixed for 2 years with repayment over 25 years - over the first two years I would have repaid £21,039.00 with repayments totalling £39,648 (£1652 per month). So borrowing the money for two years will have cost me £18,809

So would it only cost me £195 more to borrow on the 35 year option over the course of two years, after that I'd negotiate a new mortgage rate and term. I've read that it's better to have a 25 year mortgage if possible as you pay back sooner, however these calculations seem to show that the 35 year option is better over the first two years and would mean I have £329 spare per month (which I could put into savings meaning I'd save £7,896 over two years).

So why would I choose a 25 year mortgage if it costs me only £195 less and I'd lose out on the opportunity to put £7,896 into savings?

Figure I'm missing something!

Thanks!

So the choice is about £8k in savings, or about £8k less in mortgage debt. If you can get more than the mortgage interest rate (after tax) with the savings, it makes sense to go for the savings (ie 35 year mortgage), otherwise pay down the mortgage as much as you can (ie go for the 25 year). You could probably get high enough interest if you messed around with current accounts and regular savers.

nev87

In that hypothetical calculation the amount borrowed would be £362,500. I was using the Money Saving Expert Mortgage Calculator for my calculations (similar to the tool linked to).

I am aware that it would be paying 10 years more interest overall, but my query was focusing very much on short term of 2 years for a particular hypothetical situation. In the long run, beyond the immediate 2 years, I'd want to switch to a shorter term mortgage of say 25 years when taking out the next mortgage deal after the 2 year fixed term was up. So please can you take another look at my questions in light of this.

Also, side question: do you generally get the same rate from a mortgage company whether it's 35 or 25 year mortgage - I believe so?

Thanks

AnotherJoe

nev87 wrote: »

So why would I choose a 25 year mortgage if it costs me only £195 less and I'd lose out on the opportunity to put £7,896 into savings?

Figure I'm missing something!

Thanks!

You're missing that the £7,896 would be taken off the mortgage so when you come to sell, you'll need to borrow less.
Alternatively, you'd have £7,896 spare in your savings account to give you more flexibility, or an emergency fund, or whatever, or to put some or all in a pension which will almost certainly give a better payback over the 35 years than overpaying.