[Closed] Mortgages again.... first time buyer logic.. getting there

On a fixed rate, go for the shortest term you can [u][b]afford[/b][/u].

On a fixed rate, go for the shortest term you can afford.

This. If you're fortunate enough to be able to overpay on a 20-year deal, you're in a good position.

do you have an expenses spreadsheet?

(come back when the answer is yes)

are you being honest with your costs? (bills, car, booze, travel, etc. etc.)

(come back when the answer is yes)

then this:

On a fixed rate, go for the shortest term you can afford.

It comes down to your appetite for/approach to risk. How likely is it that your circumstances may change during the 5 year fixed period? Do you need the additional money you may have from the longer term, bear in mind you'll now be responsible for all costs associated with your house.

Personally I'm financially risk averse, I'd go longer term to reduce the monthly outgoings, overpay if possible and then if there was any spare put it into savings that I could access if I needed to during the 5 years but if it was unused could be a lump payment at the end of the fixed term.

Have you seen a property yet? Does the property need any work? Kitchens and bathrooms or a new boiler can soon rack up into thousands.

Do you have a car? Will you need a car?

Consider the things that might mean you can't overpay as much as you like.

Am I more sensible going for a 30 year term mortgage so just incase "all goes to pot" my monthly required payments are less than if I was on a 25 or 20 year term?

No.

Nationwide allow unlimited overpayments on their mortgage if you have a current account with them, and you can choose whether to reduce the monthly payment or the mortgage term each time you chuck money in.

Also, decision in principle is not a mortgage offer...

The total term is somewhat irrelevant, you will not see out the term with the same mortgage deal.

If you want fixed costs, get the initial term fixed rate as long as possible, and ensure you can overpay your mortgage (both in affordability terms and T+C's of the deal). Get this on the longest deal as your monthly commitment will be lower (accepting the total cost is higher).

Now you have a fixed amount you can budget around, with the lowest mandated commitment. Now in that 5 years overpay as much as possible - this reduces your term to the same effect as having a 20 year deal. So you are now paying the same monthly as if you were on the 20 year deal therefore you're taking out the total cost nicely and saving heavily. Crucially if something goes really wrong (you are made redundant, your car explodes and you need to bridge the gap that month, your cat is covered in Sudacream and you need to get it dry-cleaned etc), you don't overpay for a month or two and you can keep you repayments going and the wolves at the door.

Committing to yourself to pay a higher monthly amount, and committing to pay to the bank to overpay each month are two different things - when the sun is shining all is fine for both, as this is your first house you never know, so commit to overpay and you have a fallback to work within.

Also, decision in principle is not a mortgage offer...

This *1000

Our decision in principle from HSBC stated that we could borrow over £400k, when we went back for a full mortgage at £310k on a £430k house, they told us that at our 75% LTV, they could only offer £234k...beware!

I'm not sure I get the "go on the shortest term you can afford"

20 year mortgage at 3.6% with no overpayments (lets just assume 3.6% is fixed for life).. then the interest paid on the life of the mortgage is a shade under £55k.
£895 monthly

25 years mortgage with £100 overpayments per month (again lets assume 3.6% for life) is a shade over £55k
£788 monthly (so £688 monthly with no overpayment)

30 year mortgage with £175 overpayments per month (again 3.6% bla bla) is just a shade over £55k interest
£793 monthly (so £618 monthly with no overpayment)

So the 30 year one would give me the flexibility to have a smaller monthly footprint assuming I needed to stop over paying for any reason.. I'd likely keep the cash in my ISA or something similar in that year period then actually just pay it as a lump before the mortgage year started again.. as it's always helpful having some cash I can get my hands on as a sole trader.

I actually plan on paying much more than £100 a month ... the way I understand it is you can pay up to 10% off the total mortgage amount each year and I'd hope to be close to that each year but whilst remaining totally risk adverse whilst I get my head into the whole mortgage thing properly as I'm sure there is probably lots of other things I can do to improve it too.

Am I missing something entirely? Should terms not just be ignored based on my logic as I'll never run the cost of seeing them til the end? and Ideally we're looking around a 15 year mortgage tops when overpayments are taken into consideration?

Thanks

Just replying to some posts that were written whilst I was typing... I was told I could borrow around £300k and I'm only after £136k so it's quite comfortable I believe.. I'm certainly not trying to live above my means or borrow up to the upper limit of what they said just because I can.

What mynamesnotbob has said has I think agreed with me and clarified that a 30 year term is probably the more sensible option for risk averse me as long as I plan on overpaying I'm not shafting myself on a longer term.

10% overpayment cap on this mortgage I'm looking at is more than enough really for me and I'd probably struggle to overpay more than that in the first 5 years anyway so when I renew I can look at an unlimited overpayment plan?

I know a lot about the house and its only 10 years old so I dont think there will be too many unexpected but thats part of the reason I want to keep the fixed monthly to a minimum.. just incase... my first year includes me saving up a 6/12 month nest egg again so that if anything goes pete tong I'm covered.

I'm good with cash in a business sense and don't have any commitments personally.. it's just finance deals like this are uncharted territory and feel a bit grown up!

Ignore me, i read 'building society' as 'housing society'. d'oh!

I looked into it, and you're right, there appears to be no drawback to getting a 30 or 40 year mortgage and overpaying it every year, effectively turning it into a 20 year mortgage but with the option to massively ramp down payments if, for instance, you lose your job or something.

Dooosuk makes a good point.

The unseen costs of house ownership compared to renting are significant. Just general servicing of boilers and fixing the odd things that break add up. We then end up doing a couple of things every year either of necessity, to make life easier or because stuff wears out. I'd be surprised if it didn't run to a few £K/year on average for us recently.

I recently took out a 10 year deal. I am not sure of the benefits of a 5 in the current economic climate. With the world economy on the brink of another correction, I can't see interest rates rising much for the next five years. would try to either save money with a 2 year at a lower rate, or go for longer.

When you over pay you can choose how that over payment affects your mortgage, it can either reduce the monthly cost, or reduce the term, so you could start with a longer term and reduce the term with the over payments. Another option is go for the shorter term and save the over payments for security. Put them in to Santander or something with a half decent return.

Which leads me to think going on a 30 year term is more sensible so that those yearly unexpected costs can be accounted for if needed? yes then I'd take the hit wouldn't I on a slightly longer mortgage but I get the choice for that flexibility to drop an overpayment if needed?

Like I say it's not that I'll be on the breadline at all and I'm good with money in business it's more if there was a draw back to going a longer term and overpaying but it doesn't like Horatio has confirmed that it doesn't seem there is an issue either.

I think it's fairly sensible to go for the 30 year mortgage and try to hit as much overpayments as I can after making sure my nest egg for the rainy day would cover my costs for 6/12 months

it may even make it easier to get the mortgage if it's a longer term anyway so that can't be a bad thing!

dogmatix - I hear you - I don't know enough about the market to take a gamble on which way the rates would go so I feel grabbing something fairly fixed at the moment seems sensible for me as I know 2 years would fly by so 5 seems ok for me with the overpayment flexibility.

I guess after 5 years if I'm doing much better financially and had cash left over from the 10% overpayments I can change over to a discount mortgage or something similar and get an even better monthly.

I'd be talking about knocking it off the term of the mortgage rather than off the monthly for sure.

Thanks

so you could start with a longer term and reduce the term

Absolutely no point in this whatsoever; it reduces your flexibility. Martin Lewis wrote an article about it.

I'll see if I can find it.

Here you go: [url= http://www.moneysavingexpert.com/news/mortgages/2015/03/decrease-the-term-or-overpay-my-mortgage-martin-lewis-answers ]MSE Article[/url]

Thanks - appreciated

"Absolutely no point in this whatsoever. Martin Lewis wrote an article about it.

I'll see if I can find it."

Ill be interested to see this article.

I did exactly what the OP suggests when i remortgaged.

the rate was the same on the 21year term as it was on the 30 year term

the minimum payment on the 30 year term was much less than the 21 year term.

the only issue to watch out for is that you reduce the amount you can overpay each year as anything over the minimum is an overpayment even if its a regular overpayment.

How ever given i work in the oil patch i took the opportunity to give my self a low payment to revert to in times of trouble. RBS also lets me use my overpayments as draw down credit.

just read it Suggest you read it again - martins actually saying overpaying is the same as shortening the term .... which is what the OP wants to do.... both are good but the overpayment method gives you flexibility.

I've just read that article... I'm confused about what I'm missing - he says overpayments are good doesn't he?

What's draw down credit terry?

I seriously doubt you'll have the flexibility of picking between a 20 year and a 30yr mortgage.

Nationwide refused to give me a 30yr mortgage after I told them the monthly payments i could afford equalled to a 28yr mortgage.

Also - did you overpay monthly? or a lump sum once a year.. I think the lump suits me better for flexibility.

just means i overpay a sum each month and if i stop paying i have until that overpayment sum runs out before i need to make another minimum payment - by prior agreement with the bank but its in the contract.

With RBS - regular overpayments done as part of your monthly payment come off the principal immediately.

if you make a lump sum one off payment - and its less than 1000 pounds it doesnt come off till the end of the year...

dizcostix- you mean because you could afford it sooner than 30 years they assumed thats the shoe that fitted you and banned you from their 30 year deal? that'd be enough for me not to go with Nationwide!

Flaperon - Member
Nationwide allow unlimited overpayments on their mortgage if you have a current account with them

Not sure this is the case unless they've changed it in the last few years. My mortgage is with Nationwide, as well as mine and my partner's current accounts etc and we are only allowed to pay up to £500 extra on top of the regular payment. We are allowed to take a payment 'holiday', i.e use the extra payments in lieu of making that month's payment.

Alexxx, its more of a case of during the detailed offer process you will walk in and they say how much can you afford to pay on a mortgage monthly.

You say for example £1000, they do their checks/advice as per regulations and recommend a mortgage based on the repayments you can afford. eg 25yrs.

You then cant turn around and say actually you'd prefer a 30 year mortgage because then you would be lying about how much you can afford to pay monthly ie. less the the example £1000

It's not a personal loans service!

"You then cant turn around and say actually you'd prefer a 30 year mortgage because then you would be lying about how much you can afford to pay monthly ie. less the the example £1000"

interesting - RBS couldnt care less when i told them why i wanted a 30 year mortgage....and they already know i overpay often - the guy on the phone actually thought it was a good idea....

its in their interests to help you keep your house in tough times.... although point to note i was remortgaging after 4 years with RBS already.

alexxx I completely understand on the 5 year, Given the option I will tend to go for security. Is 10 year not an option for you? The halifax 10 year has no ERC's after 5 years.

what are the interest rates for a first time buyer on a 10 year mortgage though.......

even the 5 years were very high when i morgaged - at around 6.5% in 2012.... vs 2 years at 5.25% in 2012 and now im on 2.69% for 5 years finishing in 2020.

id have been spewing if i was locked into 5 or 10 years at the rates being offered back in 2012.... i realise its luck mostly but do you really believe that the rates will rise that quickly ?

I always go for the longest term and overpay. I currently have a 30 year term and pay as though it was a 13 year term.

Obviously you'll never keep the mortgage beyond the discount/fix period.

doosuk, I am suggesting he uses the over payments to reduce the term, or go for shorter term and save the difference. Both would mean some security held back. I am not suggesting making over payment to reduce the monthly cost. As Martin Lewis says, if you dont know the difference when making over payments, banks will often reduce the monthly charge and keep the term the same.

trail rat point taken on the 10 year... didnt think about first time buyer regarding rates. It's probably all a much of a muchness at the moment regarding 2, 5, 10year mortagages and their benefits. The market being so volatile. Could be in stagnation for years. Could still be low rates in 5 years time.

dizcostix - I had a meeting the other day with the building society and they were happy with any term I wanted really.. all they said is that I have to give them 6 months accounts and the 2 end of years for my sole trader business for them to "ok" that I can proceed with 1 of those mortgages but no mention at all that they'd hold back a 30 year mortgage from me.

It's not about lying how much I can afford to pay it's about getting a mortgage set to my terms so I was surprised to hear they forced you into a 25 year one.

I think 3.6% sound fair for 5 years at the ltv I've got and it sounds like I'm not missing anything with the 30 year contract as long as I'm over paying so I'm going to give it a go I think!

And hopefully we'll be on a 13 year mortgage like you are aiming for outofbreath 🙂

as with most financial matters its all a giant gamble based on risk.....and past performance isnt a guide towards the future....how ever its the only data we have 😀

just be sure to understand the terms of the risk and what the outcome to you is if they go either way.

We went with 28 years (the max they'd offer based on retirement ages) and have a joint account which we both pay roughly 100% of the mortgage into (but C.tax, and bills take up another 50%, so there's only about 50% of the mortgage payment left in it each month) with the intention that it will be used to overpay once it's built up a healthy cushion after we've finish all the DIY.

More likely it'll go on a new kitchen or an en-suite which achieves a similar effect by adding value the LTV drops and after the fixed period is up the repayments should drop.

Other things to remember:
Unless it really is a home for life, you will move at some point to a bigger house most likely.
Wages (hopefully) go up, your mortgage is (relatively) fixed for it's life. So as long as it's affordable now, any increase in your pay is disposable income which can help you overpay or offset rate rises.

e.g. £1500 net income
£1000 mortgage (assume for easy maths it's approximately 4% and interest only at this point as capital repayments are low in the first few years)
In 5 years your income might grow 25% to £1875, with the same £500 disposable income you would have £1375 to pay the mortgage, which would make the repayments even at 5.5%.
Equally you might get your pay frozen and rates might go up substantially. In which case your ****ed. Which is where the risk comes in, I'm banking on being better off than whatever percentage of the population would have to be ****ed before the government stepped in to stabilize things, if I didn't I couldn't have bought a house!

Treat fixed rates are like an insurance policy - they cost compared to variable but should the rates rise more than expected during the fix you will wont be paying any more per month. Over the fix term though it's likely you will pay more and of course after the fixed ends if rates have gone up you will paying much more for your new fixed.
I chose for a shorter term as a forced overpayment, I reasoned that if I got in to trouble the mortgage company would hopefully allow me to increase the term. For guaranteed flexibility a longer term with monthly overpayment would be better but I know I would not be disciplined enough overpay and would either spend the money on home improvements or put it in a bank account where it would earn no interest.

20 year mortgage at 3.6% with no overpayments (lets just assume 3.6% is fixed for life).. then the interest paid on the life of the mortgage is a shade under £55k.
£895 monthly
25 years mortgage with £100 overpayments per month (again lets assume 3.6% for life) is a shade over £55k
£788 monthly (so £688 monthly with no overpayment)
30 year mortgage with £175 overpayments per month (again 3.6% bla bla) is just a shade over £55k interest
£793 monthly (so £618 monthly with no overpayment)

The longer the term the more interest you pay, this is pretty basic tbh. You need to account for that in your calculations. The interest for a 130k mortgage at 3.6% on a 20 year term is about 53k, a 25 year is 67k and 30 is 82k. I don't know how you calculated it as staying static.

Go for the shortest term you are comfortable with. HSBC tried to talk us into a 15 year deal, we went with 20 but the overpayments have taken it back down so we may as well have gone with their suggestion.

Also the additional interest on a fixed is fairly substantial. I know you want certainty but even if interest rates go up 1% a year is the most that will happen.

I don't know how you calculated it as staying static.

Because he took overpayments into consideration.

Essentially, by taking the longer term and overpaying, you can end up paying the same amount of interest but have reduced risk in that you can easily and quickly lower monthly commitments if required.

If you go for a shorter period, you're committed to higher monthly payments and need a phone call or three to sort out payment windows/term extensions etc.

"Go for the shortest term you are comfortable with. HSBC tried to talk us into a 15 year deal, we went with 20 but the overpayments have taken it back down so we may as well have gone with their suggestion."

But why ? i understand you COULD but i dont see why you would advise someone to take the most restrictive product ? unless you dont trust your self to make the overpayments unless forced. i keep a spreadsheet , its motivation in its self watching the term decrease quickly.

also the equivalent tracker product at my prefered provider when i remortgaged was 2.53% rates didnt have to rise much to surpass my 5 year fix at 2.79%

On our house with Santander we got initially a two year fixed over 35 years, after the two years we have fixed for another 5 years at a cheaper rate, so I just decreased the term by 4 years so get the payments at the same rate. Easy

I'm glad how this thread has panned out as I feel the 30 year option is sounding more and more sensible... or at least not too far from the ball park of sane.. if having this much organised debt is sane..

The next thing to work out is if I should pay off my student loan (circa 10k left) before putting the rest into the mortgage... maybe I need another thread in 6 months!

The student loan rate will more than likely be a cheaper rate than the mortgage rate

I'm glad how this thread has panned out as I feel the 30 year option is sounding more and more sensible...

This.

The term means nothing if overpayments are allowed, so pick a long term.

I seriously doubt you'll have the flexibility of picking between a 20 year and a 30yr mortgage.
Nationwide refused to give me a 30yr mortgage after I told them the monthly payments i could afford equalled to a 28yr mortgage.

Nationwide would give us up to 40 years (which we took them up on), just said it had to be repaid by age 67. Really didn't care beyond that! They make more money out of you, assuming no overpayments, anyway.

According to this: http://www.moneysavingexpert.com/mortgages/mortgage-rate-calculator#results

£136k at 3.6% over 20 years you'll be paying £796 per month and after 5 years you'll still owe £110551.

£136k over 30 years you'll be paying £618 per month and after 5 years you'll still owe £122196.

If you overpay by (796-618)over 60 months you'll lowe that by £10680 to £111516 still owed.

So a difference of £965 between the two terms. It's a small(ish) price to pay for flexibility, [i]if[/i] you are allowed to overpay that amount and have the discipline to do so.

Bought our current house 5 years ago amid the tail end of the final crisis and major job worries for me. Mrs North was v keen to fix to lock in a known monthly cost.

Five years later I've paid a shed load of unnecessary interest (note that mortgages are loaded so that you pay proportionally more interest early on). The fix ends in April.

We're going to end up borrowing a chunk of money to spend on an extension + loft conversion. In light of market wobbles I doubt rates will rise this year, and even then only slowly. I'll be damned if I'm going to take out another fix. I'll just take out the additional borrowing over the same term as the balance of the mortgage.

But that's because I've been a homeowner for nearly 15 years, so have a better idea of costs. A fix isn't a bad idea for the FTB as it helps budgeting in a world where he roof, boiler and everything else is now your problem!

If it were me I'd go variable. I have been on various different variable mortgages over the last 20 years, and I am several tens of thousands of pounds better off than if I had taken fixed rate mortgages.

YMMV of course.

Suburban reuban how did you come up with the 111516 figure.... I make it 110514 after 5 years of overpaying....

Did you forget to remove the element of interest you wont pay on the balance by paying off prinicpal before it attrActs interest.

Suburban reuban how did you come up with the 111516 figure.... I make it 110514 after 5 years of overpaying....

Did you forget to remove the element of interest you wont pay on the balance by paying off prinicpal before it attrActs interest.

Possibly - I've lost me bit of paper - but your figures look even better for the OP.

£136k at 3.6% over 20 years you'll be paying £796 per month and after 5 years you'll still owe £110551.

£136k over 30 years you'll be paying £618 per month and after 5 years you'll still owe £122196.

£136k at 3.6% over 20 years you'll be paying £796 per month and after 5 years you'll still owe £110551.

£136k with a 30 year *term* but choose to pay £796 you'll be paying £796 per month and after 5 years you'll owe still £110551.

The arbitrary agreed term makes no difference.

I looked into it, and you're right, there appears to be no drawback to getting a 30 or 40 year mortgage and overpaying it every year, effectively turning it into a 20 year mortgage but with the option to massively ramp down payments if, for instance, you lose your job or something.

That's exactly what I do, for exactly that reason. It's not critical - I'm sure the building society would let me go interest only if I was in big trouble, but with a long term the minimum payments might be small enough that I don't even need that conversation.

I guess the confusion her might be term has two meanings:

a) The time it takes to pay the mortgage.
b) The number you write on the form at the bank.

a) Affects the amount of interest you pay, b) is a totally arbitrary number, unless you're obliged/choose to stick to it.

There's a lot of rubbish being posted on this thread.

1) Take the longest term possible. If you need a lower mortgage payment using a longer term because you've changed to a lower paid job or your other half is on maternity pay, the bank aren't likely to bend over backwards to help, so take the longer term whilst they're offering it.

2) Over pay as if you're on a shorter term. The 10% overpayment you're allowed is 10% of the balance of the loan - ie, if you take a 150k mortgage, you can pay off £15K or so in overpayments in the first year.

3) Fixes cost more for a longer fix. As others have said, view a fix like an insurance policy. Again, think about if you'll have kids or want to get a job that's less aggro and less money.

4) Overpay. Overpay. Overpay. If you overpay, most lenders will not shorten the term of the loan unless you ask. So if you need to stop overpaying, you'll have the benefit of a lower payment than you would have had if you'd never overpaid at all.

5) Have I mentioned overpaying?

All clear in my head Terry apart from point 4... so do you recommend overpaying that makes your monthly payments smaller or overpaying that shortens your term time? I thought we were going with the shortening of term time was the right one?

Shortening the term is the right one... Over payments to reduce monthly payment is more expensive in the long term.

shorten the term always the term ....

most banks will make your monthly smaller automatically - you need to request that you want to reduce the term rather than the monthly payment.

And even with this i find my self having to phone to remind them from time to time - random mortgage amounts get taken from time to time - always below the value i want them to take - EG decembers was about 100 quid shy of what it should be. 30 seconds on the phone and they have sorted it with minimal moaning and they even take off the equivalent interest for the time between them taking the payment and me phoning them - i have all the letters they send out after ive instructed them to take XYZ a month....

My BS don't take a DD - I pay by transfer/standing order so the bank have no control over term at all.

Great idea outofbreath - thanks for the help all!

The student loan rate will more than likely be a cheaper rate than the mortgage rate

Yes, but the bank will consider the student loan repayments against pay and will reduce the amount they'll lend you. It helped to pay mine off, but it was only about 5k at that point.