What type of mortgage to take on in order to be mortgage free sooner

Hi,

my partner and I have a substantial mortgage remaining (circa 200k) but we also have fairly substantial savings/investments (sub-100k) and high incomes. This means that it should be achievable to pay off our mortgage around December 2022 with reasonable comfort. We are up for renewing our mortgage this coming October. I’m not sure whether we should go for a 2 year fixed mortgage with a rate of 0.91% (£999 fee) and stretch out that 1 year if repayment to 2 years unnecessarily, or go for a 1 year fix which, counterintuitively has a higher rate of 1.45% (but no fee). That would mean we could pay off what was left within a couple of months of the fixed term ending. The other issue is that my current provider has us on a mortgage term that has 10 years left to run. I’d like to reduce this to around 6 years in order to pay off more quickly (without having to worry about the cap on overpayments), but at the same time keeping the monthly repayments manageable in case something unexpected comes up and we don’t have as much disposable cash as we currently expect to. The trouble is that in order to change the term we’d have to go through the full affordability process from scratch! Not sure I can be bothered with that. However my understanding is that in mortgages a lot of the expected interest is “front-loaded” - this is what our broker told us when we first took out a mortgage but he very possibly had no idea what he was talking about. Just in case that’s true, I’m concerned that by having a longer term we are going to pay additional interest which will then not actually be incurred in the debt because we repaid early. I hope that makes sense!

For additional background, one of our jobs is very stable and the other is only guaranteed for another year. Higher income job is the stable one (incidentally the woman’s job, before anyone jumps to any conclusions!)

What would you do in our circumstances? I know we could invest our money and probably be better off long term but we’re very keen to be mortgage free as soon as we can, as long as it’s not exposing us to unnecessary risks.

Comments

  • Poppycat1
    Poppycat1 Posts: 376
    Photogenic Name Dropper First Post First Anniversary
    Forumite
    I'm no expert so this is my opinion only.  Use the MSE comparison calculator.  On the left hand side you can filter the mortgages to only include those with no early repayment fee.

    I am in a similar position but with much lower amounts.  When my fix period ends the end of next year, I will remortgage to a mortgage with no early repayment fee, reduce the term to six years, no charges but with a higher interest rate.  This is because I plan on repaying the rest off in 2-3 years.

    I think it's worth going through the affordability checks for the better deal.
    Without overpayments: 15 years, 1 monthsBecause of overpayments: 10 years, 10 months left until paid off
  • happymum37
    happymum37 Posts: 315
    First Anniversary First Post Name Dropper
    Forumite
    How much contingency fund do you need to keep?
    Do you have any other debt?

    Why don't you go for the 1 year and put a large chunk of your savings in and then maximise your monthly repayments with over overpayments? Then you can over pay as much as you want but if the less stable job went you could stop what you are doing and revert back to minimum payments? If I could get rid of the mortgage in a year I would absolutely go for it.  I know it makes more sense to invest the money - are you contributing to a good pension? If that's all sorted I would go for it
    X
    Part time worker.
     Plug that SAHM pension gap & Retire in style in 20 years. 
  • Yes the pension is sorted,
    no need to contribute any extra there. We would build up savings quite quickly after paying off the mortgage so I don’t want to hold off for too long for the purposes of building up a black fund, especially as our biggest expense would be gone. I would think 5k is fine? No other debts and a lot of other outgoings could be easily reduced if one of us lost our job. 
  • Thanks @Poppycat, I actually wasn’t aware there were mortgages that don’t have early repayment charges! That sounds like a good option for us, thanks so much for the tip.
  • jimjames
    jimjames Posts: 17,497
    Photogenic Name Dropper First Anniversary First Post
    Forumite
    edited 10 August 2021 at 8:34AM
    I'd generally go for the longer fixed rate especially if it is lower. I can see rates only going one way from here with inflation on the horizon and already at such a low level. Having the flexibility to clear within 2 years rather than 1 is probably safer.

    Bear in mind that you can clear part of the balance if you revert to standard mortgage rate briefly before you switch to the new rate so you aren't constrained by overpayment allowances. Also depending on the lender the overpayment allowance may be based on the original balance not the outstanding.

    So a £200k original mortgage would have a £20k per year overpayment allowance even if the outstanding balance is now only £25k. Nationwide is definitely one that works this way.

    In terms of "front loading" that's just a function of the way the loan works - interest is calculated on the balance outstanding so is much higher at the start than when later on when the balance has reduced. Initially most of your payments are interest with little capital repaid but over time that changes and later on most repayment is capital. Overpaying will automatically reduce the interest paid because the balance is lower so that isn't something to worry about.
    Remember the saying: if it looks too good to be true it almost certainly is.
  • We can overpay as much as we want in the last month but I don’t see us overpaying by more than 20k during that period, due to various factors. But very interesting to know the overpayment allowance may be based on the original balance as if assumed it was always based on the current balance (our overpayment limit is 10% before we start being charged). Thanks!
  • jimjames
    jimjames Posts: 17,497
    Photogenic Name Dropper First Anniversary First Post
    Forumite
    We can overpay as much as we want in the last month but I don’t see us overpaying by more than 20k during that period, due to various factors. But very interesting to know the overpayment allowance may be based on the original balance as if assumed it was always based on the current balance (our overpayment limit is 10% before we start being charged). Thanks!
    It's made a massive difference to our overpayments as we've been able to clear the maximum each year and have gone from around £100k to under £25k in the last couple of years thanks to the overpayments being based on the original loan value not outstanding amount. So definitely worth checking if your bank does the same. 
    Remember the saying: if it looks too good to be true it almost certainly is.
Meet your Ambassadors

Categories

  • All Categories
  • 341.7K Banking & Borrowing
  • 249.7K Reduce Debt & Boost Income
  • 449.2K Spending & Discounts
  • 233.9K Work, Benefits & Business
  • 606K Mortgages, Homes & Bills
  • 172.5K Life & Family
  • 246.8K Travel & Transport
  • 1.5M Hobbies & Leisure
  • 15.8K Discuss & Feedback
  • 15.1K Coronavirus Support Boards