5 Year Deal??

BruTamUK_2

Hi.
I'm new to this forum so please go easy on my limited knowledge!
Myself and my wife have just sold our 3 bed semi to first time buyers after just 5 days on the market for £147000. How lucky is that! We have bought a 3 bed detached for £198000. We currently owe £88000 on our mortgage which is going to be paid off. Overall after paying for the fees of moving we are taking out a £144000 Accord mortgage for 27 years fixed at 5.39% for the first 5. Our payments are £854p/m. Our joint income is £45000.
With the current market as it is, is moving house a wise move? We will have 25% equity at the start of the new mortgage, which isn't too bad. But after the 5 years our settlement figure will be around £125000. (We will easily be saving £200p/m during this time to knock off the mortgage). From what I calculate we can afford to let the value of the house drop to around £170000 in order to keep our 25% equity.
Does anyone think this is a reasonable assumption over the next 5 years?
I understand no one can predict were property values and interest rates will be by then, but we would like to be in a position were we can remortgage on another fixed rate.
Does anyone think we may be taking on too much in the current situation?
Should we look at a longer term deal? Maybe 10 years fixed rate?
Its not too late to change the mortgage, we haven't signed anything yet. Neither is it too late to stay put and not move!
Cheers,
Bruce.

homer_j_3

Have you sat down and done a budget planner?

That should tell you if it is affordable. If you have not then you need to do one and it work out what spare money you will have left.

BruTamUK_2

After all outgoings including the £200p/m savings we will still have £600-700p/m left.
Our only worry is if this figure is going to be eaten up in 5 years time if interest rate rise accordingly. Realisticly will interest rates rise that much to increase our mortgage by £600p/m?
Will this slump last 5 years?
As I asked, would we be better getting a 10 year fixed rate?

homer_j_3

There is no control on future interest rates, people cannot guess right the next interest rate right half of the time.

My thoughts would be to consider considerably shortening your term so you have £200 savings and £200 contingency and then get the shortest term possible. Clearly without doing any work with you, it is just a consideration/option for you.

A quick calculation tells me that for £300 per month, you can get the term down to 15 years. The interest saved will be shockingly good for you and your debt would reduce a lot more speedily and then when you come to remortgage, you can remortgage a smaller debt further reducing the liklihood of affordability as you could always then extend the term if you needed when you came to remortgage.

BruTamUK_2

Thanks for your advice. I think I understand what you are saying.
Using Karl's Mortgage Calculator, reducing our term now to 15 years, increases our payments by £300p/m. Our settlement figure in 5 years time would be in the region of £109000. Any additional savings would come off of this too.
I take it this will work out better than leaving the term at 27 years and payments at £850p/m, then saving £300p/m to pay off at the end of 5 years?
The only reason I'd rather do it this way, is if we needed money in emergency, it would be easily accessible as savings.

homer_j_3

To me, if you have had an adviser on this case, you have not got the right product. If you have done this yourself then you may want to make use of a good broker.

If your mortgage has daily interest, you will pay a lot less by doing it the way that I said. If you feel that you may want to pay it back, either go for a term in between, meaning that you have more to put in savings which can be paid off but still save interest.

Or

Find a product that has fully flexible features where you can overpay and drawback if need.

BruTamUK_2

I have done it through a local independent broker.
The mortgage allows 10% of the total loan overpayments per year (£14400).
I'm thinking I should maybe put the £300p/m in a isa and pay lump sums off each year.
I think interest is calculated daily.

homer_j_3

I think that you have either not explained what you want (or had chance to) properly.

I would talk to your adviser again. You get 10% overpayment but cannot get it back if you want.

If you have 8-900 spare a month and have been realistic with your budget planning (go through your bank account to make sure you have everything) then you can easily put your maximum a month into an ISA and still overpay.

What is more concerning for you? The fact that you are worried that you will not be able to afford the mortgage in 5 years time or Having more than 3k a year in the bank for cash.

To be fair, its the answer to this question that will determine what you do. I would expect that you want to do have both so looking for the inbetween would be maybe a flexible mortgage or even an offset possibly.

I would always look to get my debts paid first and a mortgage is just that.

BruTamUK_2

Looking at it that way, I suppose what is most important is being able to afford the mortgage in 5 years time. It wouldn't be a worry if the current mortgage/housing situation was looking healthy for the future.
Might have to go back to the advisor and see what he says. Just hope there are still some deals out there.
Many thanks for your advice.
Bruce.

homer_j_3

No problems.

If you have just told your adviser you want to get X type of deal and do not want to pay more than Y then a lot of advisers become order takers. They will do it.

Me personally, I will talk to my clients and get a feel for what they want and then work to those needs. Clearly for what ever reason that has not happened hear and it could be something as innocent as that you have thought further about it and now realise you want something different.

Can I ask where 27 years came from?

BruTamUK_2

I'm 33. Didn't want to have a mortgage past the age of 60. At first we set our monthly limit at £850. This worked out at 27 years.
Since then with the current situation, we have decided put more money into the mortgage over the next few years, so that we don't get caught out in the future if things get bad with interest rates.
Having read what you've said, maybe we would be better cutting the term now. We had intended doing this as the mortgage went on, probably as we remortgage.
Bruce.