Are there any benefits of shorter mortgage term?

Newbie_John

If we take mortgage at 6% for either 10 years or for 30 years the difference will be in monthly payments. But if we save the difference in a saving account at the same rate - we don't end up paying more in interests.

This way we gain a lot of flexibility - we can use it for anything we want as well as repaying the mortgage in full whenever we can after end of fixed term.

kingstreet

If the savings account pays a higher rate of interest than the mortgage, save.

If the mortgage rate is higher than the savings rate, make voluntary mortgage overpayments.

Newbie_John

Yeah, that's my point - but we only get these possibilities taking longest possible term - we get to decide where most of the money goes (according to what you said). On shorter term we have to put it towards mortgage - monthly payments are higher.

I understand some other specific cases like:
-bad money management and wasting it on random purchases
-tax issues, effectively lowering savings
-the feel of wanting to be mortgage free asap

But for average person it doesn't make sense to go for 10 years if they can for 30? 

kingstreet

A shorter term gives payment discipline.

If you are the kind of person who will save or overpay, take the longer term and have lower contractual payments. If you aren't, the shorter term will force you to comply to achieve the desired outcome.

CSI_Yorkshire

Newbie_John said:

Yeah, that's my point - but we only get these possibilities taking longest possible term - we get to decide where most of the money goes (according to what you said). On shorter term we have to put it towards mortgage - monthly payments are higher.

I understand some other specific cases like:
-bad money management and wasting it on random purchases
-tax issues, effectively lowering savings
-the feel of wanting to be mortgage free asap

But for average person it doesn't make sense to go for 10 years if they can for 30? 

That first point sounds entirely like "the average person".

The third one does too.

RelievedSheff

CSI_Yorkshire said:

Newbie_John said:

Yeah, that's my point - but we only get these possibilities taking longest possible term - we get to decide where most of the money goes (according to what you said). On shorter term we have to put it towards mortgage - monthly payments are higher.

I understand some other specific cases like:
-bad money management and wasting it on random purchases
-tax issues, effectively lowering savings
-the feel of wanting to be mortgage free asap

But for average person it doesn't make sense to go for 10 years if they can for 30? 

That first point sounds entirely like "the average person".

The third one does too.

100% agree.

And we fall fully into both categories. Can't wait until the day that we are mortgage free and to get there we will go for the shortest term mortgage possible and overpay as much as we can.

Newbie_John

Alright, so it is really down to self-discipline 

dimbo61

Huge huge benefits in clearing that mortgage debt ASAP 
We saved £50,000 in interest  by paying  off the mortgage in 10 years rather than 22.
This website is all about money saving 

CSI_Yorkshire

dimbo61 said:

Huge huge benefits in clearing that mortgage debt ASAP 
We saved £50,000 in interest  by paying  off the mortgage in 10 years rather than 22.
This website is all about money saving 

Huge huge detriment if you're clearing a low interest mortgage debt when you could be earning higher interest with the same money in savings.

This is precisely the OP's point 3.

kwangomango

Newbie_John said:

If we take mortgage at 6% for either 10 years or for 30 years the difference will be in monthly payments. But if we save the difference in a saving account at the same rate - we don't end up paying more in interests.

This way we gain a lot of flexibility - we can use it for anything we want as well as repaying the mortgage in full whenever we can after end of fixed term.

Only if the savings rate (after tax on interest) is better than 6% for the entire 30 year fixed term though. If interest rates drop, that would be unlikely.

Newbie_John

kwangomango said:

Newbie_John said:

If we take mortgage at 6% for either 10 years or for 30 years the difference will be in monthly payments. But if we save the difference in a saving account at the same rate - we don't end up paying more in interests.

This way we gain a lot of flexibility - we can use it for anything we want as well as repaying the mortgage in full whenever we can after end of fixed term.

Only if the savings rate (after tax on interest) is better than 6% for the entire 30 year fixed term though. If interest rates drop, that would be unlikely.

Obviously this will vary over the time of the mortgage, but with 30 years you get all the flexibility:
- if mortgage % < savings % = you can make more money saving
- if mortgage % > savings % = you can overpay 10%-20% balance yearly
- if you short of money = you can use your buffer

With shorter term you stretch your finances and can't really overpay/save and when in need for money you need to remortgage which can be difficult/costly.