20 years or 25 years?

moscow_flyer

Hi...I could use some advice please!! Im soon going to move and need a new mortgage.

I've been advised to get a 25 year instead of 20 year mortgage - thus obviously reducing the monthly payments - the advisers logic being that I can still make regular overpayments when possible - but having the safety of a lower more affordable monthly payment.

I looked on a mortgage calculator website and put the same details in for 2o years then 25 years - This gave me a true cost of approx £5k more for the 25 year option - I'm not sure what this "True" cost means - I think its a cost over 5 years (The website was moneysupermarket).

Can anyone advise on the pros / cons - which is the best option?

Thanks.

lisyloo

Pros (of 25 vs 20)
1) lower payment

Cons (of 25 vs 20)
1) It more expensive. You are basically "renting" money. It's bound to cost more to rent it for longer, so overall you pay more interest. The "true" cost is the real figure for what it will cost including interest (and maybe charges as well).

The best option is to get the 25 year but overpay (if that's allowed) to get it paid off in 20.
This gives you the cheapest route but also gives you the ability to lower your payments should you fall on hard times e.g. be out of work temporarily.

The shorter your term the cheaper it is, because you are paying less "rent" (or interest) for the money.
However if you make your payments too restrictive and then can't afford them then you risk arrears, bad credit rating (which affects you for 6 years) and possibly repossession.
Hence it's sometimes a good idea to give yourself flexibility.

Most ideal option is maximum flexibility (lowest mandatory payments) but be discplined to pay off as much as you can reasonably afford.
Overpaying is generally a very good thing as the money you save is not taxed.
However make sure you haven't got any more expensive debts first, becuase it might make sense to pay them off first.
You also need to consider having an "energency fund" for rainy days and consider long term retirement savings (this can be a pension).