Should I extend mortgage term if due large payout in 10 yrs

Hols_blue

Hi there 
we are due to renew next year and currently on 1.5% so it’s going to hit us bad. We owe 250k but have just inherited and plan to pay 100k off soon leaving £150k which will keep our monthly payments the same as what we pay now. My question is, my husband retires in 10yrs and will get a large bulk payment (£100k). I’m thinking therefore to extend our mortgage term so our monthly payments are cheaper as we know we can pay most of it off in 10yrs. Would that make sense? I’d like to benefit from paying the large bulk off now but only way to do that is extend the term. 

Emmia

You'll pay a lot more in interest if you extend the term, so the overall cost will be higher.

For example, you owe £100k and have a mortgage rate of 4% 

Paying it off in 5 years will involve a monthly payment of £1,842 and the total cost of the mortgage (including interest) will be £110,499

Paying it off in 10 years means a monthly payment of £1,012 but a total cost of £121,494

Paying it off in 15 years means £740 a month in payments, but a total cost of £133,144

MattMattMattUK

Personally I would not extend the term, neither would I bank on the £100k in ten years time, that is more than enough time for a company to go bust, so unless that is contractual (rather than discretionary), from a government department and completely iron clad, then plan to pay the mortgage off normally. 

Hoenir

Extending the term doesn't make it "cheaper".  Ultimately will cost you far more in terms of the amount of interst you'll pay. Also may leave you exposed to higher interest rate levels in the future. 

chile_paul2

Hoenir said:

Extending the term doesn't make it "cheaper".  Ultimately will cost you far more in terms of the amount of interst you'll pay. Also may leave you exposed to higher interest rate levels in the future. 

However - if the OP's plan is to pay off from a tax free pension lump sum and by reducing their mortgage payment currently they can increase payments into their pension then, dependant on their current marginal tax rate, it might be far more tax efficient and sensible to do what they suggest. Especially if increasing payments into their pension now would allow them to maximise employer contributions as well.

Emmia

chile_paul2 said:

Hoenir said:

Extending the term doesn't make it "cheaper".  Ultimately will cost you far more in terms of the amount of interst you'll pay. Also may leave you exposed to higher interest rate levels in the future. 

However - if the OP's plan is to pay off from a tax free pension lump sum and by reducing their mortgage payment currently they can increase payments into their pension then, dependant on their current marginal tax rate, it might be far more tax efficient and sensible to do what they suggest. Especially if increasing payments into their pension now would allow them to maximise employer contributions as well.

Is the OP planning to invest in pensions though? Not just use the extra cash on everyday spending, holidays etc. 

BarelySentientAI

Emmia said:

You'll pay a lot more in interest if you extend the term, so the overall cost will be higher.

For example, you owe £100k and have a mortgage rate of 4% 

Paying it off in 5 years will involve a monthly payment of £1,842 and the total cost of the mortgage (including interest) will be £110,499

Paying it off in 10 years means a monthly payment of £1,012 but a total cost of £121,494

Paying it off in 15 years means £740 a month in payments, but a total cost of £133,144

Isn't that the wrong comparison though?

Looking at the OP's question, they are effectively deciding between taking a 15/20/25 year term and in each case paying it off in 10 years.

The actual differential cost is how much extra interest they would pay in the next 10 years, not over the original term of the mortgage.  Maybe that's what you calculated, but it doesn't sound like it to me.

Emmia

BarelySentientAI said:

Emmia said:

You'll pay a lot more in interest if you extend the term, so the overall cost will be higher.

For example, you owe £100k and have a mortgage rate of 4% 

Paying it off in 5 years will involve a monthly payment of £1,842 and the total cost of the mortgage (including interest) will be £110,499

Paying it off in 10 years means a monthly payment of £1,012 but a total cost of £121,494

Paying it off in 15 years means £740 a month in payments, but a total cost of £133,144

Isn't that the wrong comparison though?

Looking at the OP's question, they are effectively deciding between taking a 15/20/25 year term and in each case paying it off in 10 years.

The actual differential cost is how much extra interest they would pay in the next 10 years, not over the original term of the mortgage.  Maybe that's what you calculated, but it doesn't sound like it to me.

I offered the figures as examples, the OP should do their own calculations (with one of the online tools) using the real numbers to work out the costs.

If they take a longer term but pay off early, the cost of any Early Repayment Charge would also need to be factored in.

Hoenir

Emmia said:

BarelySentientAI said:

Emmia said:

You'll pay a lot more in interest if you extend the term, so the overall cost will be higher.

For example, you owe £100k and have a mortgage rate of 4% 

Paying it off in 5 years will involve a monthly payment of £1,842 and the total cost of the mortgage (including interest) will be £110,499

Paying it off in 10 years means a monthly payment of £1,012 but a total cost of £121,494

Paying it off in 15 years means £740 a month in payments, but a total cost of £133,144

Isn't that the wrong comparison though?

Looking at the OP's question, they are effectively deciding between taking a 15/20/25 year term and in each case paying it off in 10 years.

The actual differential cost is how much extra interest they would pay in the next 10 years, not over the original term of the mortgage.  Maybe that's what you calculated, but it doesn't sound like it to me.

I offered the figures as examples, the OP should do their own calculations (with one of the online tools) using the real numbers to work out the costs.

If they take a longer term but pay off early, the cost of any Early Repayment Charge would also need to be factored in.

The current product is due for renewal next year. At that point a lump sum payment can be made. 

BarelySentientAI

Hoenir said:

Emmia said:

BarelySentientAI said:

Emmia said:

You'll pay a lot more in interest if you extend the term, so the overall cost will be higher.

For example, you owe £100k and have a mortgage rate of 4% 

Paying it off in 5 years will involve a monthly payment of £1,842 and the total cost of the mortgage (including interest) will be £110,499

Paying it off in 10 years means a monthly payment of £1,012 but a total cost of £121,494

Paying it off in 15 years means £740 a month in payments, but a total cost of £133,144

Isn't that the wrong comparison though?

Looking at the OP's question, they are effectively deciding between taking a 15/20/25 year term and in each case paying it off in 10 years.

The actual differential cost is how much extra interest they would pay in the next 10 years, not over the original term of the mortgage.  Maybe that's what you calculated, but it doesn't sound like it to me.

I offered the figures as examples, the OP should do their own calculations (with one of the online tools) using the real numbers to work out the costs.

If they take a longer term but pay off early, the cost of any Early Repayment Charge would also need to be factored in.

The current product is due for renewal next year. At that point a lump sum payment can be made. 

But not if they don't have the cash until 10 years' time.

Emmia

Hoenir said:

Emmia said:

BarelySentientAI said:

Emmia said:

You'll pay a lot more in interest if you extend the term, so the overall cost will be higher.

For example, you owe £100k and have a mortgage rate of 4% 

Paying it off in 5 years will involve a monthly payment of £1,842 and the total cost of the mortgage (including interest) will be £110,499

Paying it off in 10 years means a monthly payment of £1,012 but a total cost of £121,494

Paying it off in 15 years means £740 a month in payments, but a total cost of £133,144

Isn't that the wrong comparison though?

Looking at the OP's question, they are effectively deciding between taking a 15/20/25 year term and in each case paying it off in 10 years.

The actual differential cost is how much extra interest they would pay in the next 10 years, not over the original term of the mortgage.  Maybe that's what you calculated, but it doesn't sound like it to me.

I offered the figures as examples, the OP should do their own calculations (with one of the online tools) using the real numbers to work out the costs.

If they take a longer term but pay off early, the cost of any Early Repayment Charge would also need to be factored in.

The current product is due for renewal next year. At that point a lump sum payment can be made. 

The lump sum doesn't clear the mortgage next year,  it shrinks it, but there is still £150k to pay off.