Mortgage Term - How do you decide?

IAMIAM

big_saver_5 said:

We have done a longer term and set up a standing order to pay extra as I dont really want the mortgage to retirement but we are disciplined enough to overpay
 Our mortgage broker advised a longer term for two reasons- 1) we are both self employed so we have flexibility to have lower payments if needed and 2) we have an overpayment/underpayment option on our mortgage so by overpaying we are building up a fund that if things go really wrong we can reduce payments further or have a payment break for a period of time. We borrowed 20k more than we needed and put that straight into the mortgage so we already have 1 year of mortgage payment break if we need it (we had a big deposit) doing this didn't cost us anything as we were well within the ltv boundary and paid it in a couple of days after completion but again we wanted to have a bit of flexibility as we are in childcare and construction so wanted to be safe if the government shut us down again. We can overpay 10% so still have 25k overpayments available for the year if we can.

Interesting, do lenders still offer overpayment/pay back option? I cannot find any...

IAMIAM

https://blog.moneysavingexpert.com/2014/10/dont-shorten-your-mortgage-term-if-you-can-overpay/

Walker1

Hoping to buy next year and planning to get the longest term possible, work out what we should be paying if taking out a 25 year term and over pay the difference (more than likely more than the difference).

as long as you’ve got the discipline to make the overpayments it’s the safest way of doing it IMO.

goodwithsaving

I've always gone for the longest term. I overpay and double the mortgage outgoing each month with the idea that it makes it theoretically a 20 year term but I have the flexibility of a lower committed amount if I couldn't overpay. A few months I haven't overpaid as I've wanted to put myself before the house (e.g use the £500 towards a holiday instead) which is fine as long as you're disciplined enough to resume overpayments.

It also means should interest rates have risen when I renew in a couple of years, I'm used to paying more but have also hammered the mortgage whilst rates are lower. I wouldn't commit to a shorter term with higher payents if it wasn't needed.

Thrugelmir

goodwithsaving said:

I've wanted to put myself before the house (e.g use the £500 towards a holiday instead) which is fine as long as you're disciplined enough to resume overpayments.

Hence the discipline of a fixed monthly payment going out. What's gone you do not miss.

A quote attributed to Einstein  “Compound interest is the 8th wonder of the world. He who understands it, earns it; he who doesn't, pays it.” 

big_saver_5

We can overpay up to 10% a year and if needed can underpay up to the value of any previous under payments. Our mortgage is around 450k so we can overpay 45k (have done 20k off the bat) and as our mortgage is 1600 a month we have 12 months mortgage payments sitting there but if we need it but still have 25k we could overpay if we wanted to. I just wanted the security of being able to pay more when we can but having the flexibility of scaling back if needed. We are disciplined though. I have set the overpayment at 500 a month so it goes out same day as my mortgage 

getmore4less

Thrugelmir said:

goodwithsaving said:

I've wanted to put myself before the house (e.g use the £500 towards a holiday instead) which is fine as long as you're disciplined enough to resume overpayments.

Hence the discipline of a fixed monthly payment going out. What's gone you do not miss.

A quote attributed to Einstein  “Compound interest is the 8th wonder of the world. He who understands it, earns it; he who doesn't, pays it.” 

compound interest works on the other side and enhanced by tax relief

£200k 25y 2.5% £897pm 
go to £40years  £660pm £99k left

£237pm less going out

grossed up into a pension(salary sacrifice tax and NI) for 25 years
42% £408pm = £122k
32% £348pm  = £104k
That's without any inflationary effects.

add a tiny 1% growth
the 40% taxpayer now has a £139k pot and the 20% £118k

for 5% starting rates
£1,169pm 25y
£964 £122k  left at 25y over 40y
42% £353pm £106k
but now you expect more growth as interest rates and inflation tend to be linked
lest just have 1/2 the mortgage rate 2.5% pension pot is £147k

There is a balance but for a 40% taxpayer using net to pay down mortgage debt is rarely a good option when it can be saved in a tax wrapper. 

K_S

big_saver_5 said:

We can overpay up to 10% a year and if needed can underpay up to the value of any previous under payments.

@big_saver_5 Please, out of professional interest, can I ask which lender and when did you take out this product? This feature ( overpayment reserve, borrow back, etc) used to be seen in some mainstream products once upon a time but died a slow death over the past decade so I'm just a bit curious.

CSL0183

A good question but seeing as we are on MSE, surely the default answer to any borrowing is to borrow over the shortest term possible and the one you can afford? 

We don’t go through the same process with personal loans and car finance agreements (longest possible and overpay) so why would people opt for 35-40yrs for mortgages? Surely your first decade worth of payments will just be paying a load of interest off with a small amount of capital paid off? 

Lending is already very strict so that the bank will decide on what you can comfortably afford to pay. Your mortgage payment will already be x% amount of income. To go with huge terms, it’s ultimately acting not that much better than an IO product? I can see the benefit of having the freedom to make it up with overpayments but that needs serious discipline. 

Im in the shortest time possible camp. 

K_S

CSL0183 said:

A good question but seeing as we are on MSE, surely the default answer to any borrowing is to borrow over the shortest term possible and the one you can afford? 

@csl0183 Mr MSE himself doesn't see it in such black and white terms.
https://blog.moneysavingexpert.com/2014/10/dont-shorten-your-mortgage-term-if-you-can-overpay/