Mortgage Term - How do you decide?

CSL0183

getmore4less said:

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. 

Have never thought about using a pension vehicle to pay down a mortgage balance. Top of my head 

1) Need to wait until 57 (from 2028) to access pension funds. 

2) If you are still working at 57 and earning enough to pay HRT then any withdrawal would be pointless as it would be taxed at the same marginal rate (or even more if rates rise) as the relief you originally received. Or are you basing it on taking the 25% of the fund out? Wouldn’t you then need to crystallise your pension pot? 

3) Who wants to take large mortgage debts into their late 50’s, 60’s when they can pay them down through NET income in their 20/30/40’s?

4) Then there’s relationship breakdowns to consider, the majority of marriages over in the last 20yrs end up or will end up in divorce at some point. Why would a joint mortgage borrower utilise any over payment amounts into their spouses HRT relief pension fund with the risk that they may never reach pension age together? 

MFWannabe

It depends a lot on age when purchasing as well really. I was 44 when we purchased and went for a 20 year mortgage and started overpaying from the beginning. But I didn’t want to go for a 15 year mortgage with higher payments from the offset and I may not have a got the mortgage on a 15 year term 🤷‍♀️

big_saver_5

K_S said:

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.

Halifax and in nov this year.
I was told I can overpay up to 10% of the january balance per year and if needed I can reduce or pause my payments in the future to get back my overpayments (but wont be sent back a lump sum I can only reduce or pause future payments to claw it back)
My payment is £1600 a month on a 450k mortgage
 I have paid in 20k so if need be I could phone up the lender and not pay the mortgage for 12 months and they would take it from my 20k overpayment.
This is not something I am planning on utilising however as we are both self employed I wanted the safety blanket of being able to reduce or even stop payments if we had problems in the future.

big_saver_5

I guess the other thing is that if you go for a short term then something like maternity leave and childcare costs could make what was once affordable completely unaffordable. I think it depends on whether you are likely to overpay. I have set up a standing order to go out the same day as my mortgage so it goes out automatically 

getmore4less

CSL0183 said:

getmore4less said:

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. 

Have never thought about using a pension vehicle to pay down a mortgage balance. Top of my head 

1) Need to wait until 57 (from 2028) to access pension funds. 

2) If you are still working at 57 and earning enough to pay HRT then any withdrawal would be pointless as it would be taxed at the same marginal rate (or even more if rates rise) as the relief you originally received. Or are you basing it on taking the 25% of the fund out? Wouldn’t you then need to crystallise your pension pot? 

3) Who wants to take large mortgage debts into their late 50’s, 60’s when they can pay them down through NET income in their 20/30/40’s?

4) Then there’s relationship breakdowns to consider, the majority of marriages over in the last 20yrs end up or will end up in divorce at some point. Why would a joint mortgage borrower utilise any over payment amounts into their spouses HRT relief pension fund with the risk that they may never reach pension age together? 

There are those considerations but the one highlighted is the debt gets inflated away and is covered by the tax relieve and small growth on top is a bonus.

It the net position you need to look at not just the debt, if the debt is £100k but the savings are £150k more than they would have been not a problem.  

Good chance you won't need to be withdrawing the pension if income is maintained  as the the £1 you borrow today will need less net relative income to be paid off in the future you can still pick away at it later or once that pension pot is big enough and does not need any more.

Not for everyone.

Thrugelmir

getmore4less said:

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. 

If you can forecast 25-30 years ahead with any certainty................. 

How many people have been made redundant or lost their income due to Covid at the currrent time. Having inacccessible pension savings is of no use. When there's a mortgage to pay. 

Then you've got to hope that markets don't dip when the monies are needed to repay the mortgage.  Constantly surprises me that people have lost their aversion to taking risk. FOMO (Fear of missing out) prevails.  

Thrugelmir

CSL0183 said:

 Surely your first decade worth of payments will just be paying a load of interest off with a small amount of capital paid off? 

Few actually realise how much of the capital owed is repaid in the last few years. 

getmore4less

Remember many in their early years need to focus on LTV and getting the rate down into the sweet zone.
Also trying to stay at decent LTV on the move ups so there will be that balance to consider with not locking too much cash in the pension wrapper too early. 

Those under 60% LTV have been getting mortgage rates very close to  savings rates that the time to be looking at retirement investment where returns have been a lot higher long term.

JGB1955

Back in the seventies you didn't decide - there was only one option and that was a 25 year term.  Luckily, after a couple of years we were able to swap our 15% Abbey National mortgage for a Nat West staff one (at 5%).  Still had to pay tax on the benefit in kind for 15+ years.  Even luckier, husband was made redundant and that paid off the remaining £18K back in 1996.  Mortgage free for almost 25 years now!

getmore4less

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? 

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. 

Generally not done for other loans because rates are higher so returns are not attractive, also there is the life of debt should be less than the life of the thing it bought. 

This is particularly true for depreciating assets you do not want to be borrowing for the next one while paying for the last one.