Would Getting a Larger Term Work? 18 January at 7:54AM in Mortgages & endowments 4 replies 272 views

User36750

I read this on the internet from a first time buyer...

FTB. I was playing around with mortgage calculator and thought it seems prudent to max out the mortgage terms (say 40) instead of getting (say 25) with higher monthly payment and use the monthly difference (say 350) to overpay. which afaict reduces the principal of the mortgage, so in a couple of years i will have better ltv since i have paid more principal of the mortgage, and can then remortgage it to a new term (say 25) with better rate and less interest to pay.

Would this, in theory work?
And I guess it would only work for a FTB - if you're already in the best level of LTV, then there's no point in getting a longer term, then overpaying?

caprikid1

Not sure this works.

Surely you are just changing it to a shorter term in effect, a 25 year mortgage is just a 40yr mortgage being overpaid !.

Also you may get a worse rate for a 40yr term so most likely will work out more costly.

What maxing out the mortgage term does is give you flexibility of affordability if tight on affordability or irregular bonus / income.

TBagpuss

As far as I know, lenders look at your LTV, not at what proportion of the original lcapital you've paid, so I can't see that overpaying a on a 40 year mortgage rather than paying the normal rate on a 25 year mortgage ould have ay impact at all.

Having a longer term *may* be helpful if you want o build in some breathing space - e.g. if you think you can afford to overpay on a (say) 30 year loan) but are not 100%  sure, or think you can afford it now but expect your situation to change. For example, if you were taking aout a mortgage with an initial 5 yeaar fix but exoecting to start a family and have lower income / higher outgoings  in years 4 and 5, you might consider a slightly longer term, plan to overpay but have the comfort of knowing you can reduce your payments if you need to. Equakly if yuou are self employed and have variable income then uilsing in some flexibility may be helpful

 But of course you have to balance it against any differneces in interesrt rates, consideration of how disciplined you are likely to be about overpaying, etc. 

dimbo61

Debt is debt.
If you put the figures  into one of the many online mortgage calculators you will soon see that you end up paying twice the original amount borrowed on say a 20/22 year mortgage term.
Paying over 30/40 years makes that worse.
However if you can get a 40 year term ( young enough ) them you can overpay every month and reduce the debt which then reduces the term and amount of Interest you pay.

ElwoodBlues

Yes, it works, in terms of maximum flexibility. It's exactly what I did to have the most options available. You can always overpay every month (assuming your mortgage agreement permits it), and then you can drop your repayments back to the standard amount any time your need. So you're effectively shortening the mortgage term by overpaying (or reducing your standard repayment).

The lenders are usually happy to let you over pay, but if it's the other way around and you want to extend your term/reduce your monthly payments below the initial agreement, then they'll give that a lot more scrutiny.