10yr Fixed Rate Mortage or risk shorter terms?

[Mercenary Keyboard Warrior]

Can someone re educate me here, why pay mortgages off early when they are at such good rates? wouldn't you be better with full term and inflation helping make the payments less significant and investing any savings elsewhere with much better returns?

Its about risk and confidence for most people.
Yes technically your in the same position if you have a mortgage of £100k and savings of £100k to someone with no mortgage and no savings.

The problem is consistently getting mortgage matching returns after tax for most people comes with some risk. That gets harder and harder as the amounts rise.

For me personally its a goal, I am happier aiming for the house being mine. Then I will allow myself to splash out, silly car etc. I currently have to limit myself to the time I spend in the motors section, people like Kindai and Gibbo could very easily lead me astray at the moment!

The other issue is the gamble on rates, if rates did go up, you need to have liquidity on the savings (really investments in order to be able to beat the cost of the mortgage borrowings), or you end up paying the higher rates

 

[hornetstinger]

Can someone re educate me here, why pay mortgages off early when they are at such good rates? wouldn't you be better with full term and inflation helping make the payments less significant and investing any savings elsewhere with much better returns?

If pay off 10% off the original mortgage, I'll be saving £1200 interest for the first year alone the £1100 for second year , £1000 for third year etc.

 

[dowie]

Can someone re educate me here, why pay mortgages off early when they are at such good rates? wouldn't you be better with full term and inflation helping make the payments less significant and investing any savings elsewhere with much better returns?

Yes, if you've got a savings account paying a higher rate then it is a no brainer, savings rates are generally rather low these days and the juicer rates are often somewhat limited. Of course some people would, psychologically, rather just overpay their mortgage - which isn't necessarily rational (at face value at least) if they've got better rates for that cash elsewhere but I guess could be somewhat rational if they might otherwise be at risk of impulsively spending it etc... then again (as highlighted in a previous post) overpayments to a mortgage can often be treated as a sort of savings account too and withdrawn if needed.

If pay off 10% off the original mortgage, I'll be saving £1200 interest for the first year alone the £1100 for second year , £1000 for third year etc.

He's not talking about otherwise just spending the overpayment but rather sticking it in a savings account at a higher rate ergo earning interest. Of course there are situations where overpayments are sufficient to increase your LTV to the point where a better mortgage deal is available in which case overpaying might well be optimal.

 

[hornetstinger]

10% of the original loan?

Yeah pretty much any mortgage is paid off around 5-6 years if you can make 10% of the original loan amount in additionals per year, it needs to be a really really long loan term to stretch that much longer.

When I moved a few years ago I took a 10 year fix with 20 year term. I rebuilt savings for first couple of years, and now overpaying 10% annually. Will be cleared in year 8 (just over 7 years total), but I only paid the normal mortgage amount as i said for the first couple of years.

Who is the lender? Nationwide allow you to keep standard payments the same, make overpayments and also keep the original term the same. The overpayments go into a reserve that techniclally you can use for a payment holiday, only committment is you stick to the original repayment date.

Yeah paying off 10% of original loan per year so that £5300. It's with nationwide.


Rather than pay 10% over the year I have and will pay when the mortgage refreshes. If I pay 10% in the last month before the refresh you'd be paying interest on that £5000.

 

[Randomface74]

I had an interesting mortgage renewal recently. I have overpaid quite a lot and it's gone into an "overpayment reserve". When it comes to LTV (which determines your rate) they don't count the "overpayment reserve" as paid - you can call up and sort it out, but then you can't use it for payment holidays anymore.

 

[Syla5]

I had an interesting mortgage renewal recently. I have overpaid quite a lot and it's gone into an "overpayment reserve". When it comes to LTV (which determines your rate) they don't count the "overpayment reserve" as paid - you can call up and sort it out, but then you can't use it for payment holidays anymore.

I hope they reduced your interest payments on your mortgage capital by the amount of your overpayment pot, or paid you interest on your overpayment pot, other wise your overpayments have done nothing for you yet.

 

[Randomface74]

I hope they reduced your interest payments on your mortgage capital by the amount of your overpayment pot, or paid you interest on your overpayment pot, other wise your overpayments have done nothing for you yet.

Yea that part is working fine. It's just weird it doesn't count to LTV by default.

 

[cheesyboy]

Yea that part is working fine. It's just weird it doesn't count to LTV by default.

I think it's because you can opt to withdraw that overpayment balance

 

[Randomface74]

I think it's because you can opt to withdraw that overpayment balance

I can't withdraw it, it's for payment holidays only.

 

[hornetstinger]

Just phoned nationwide, mine said overpayment reserve too but it has been deducted from the total, and paying less interest. Ie in month before the £5000 paying soemthinf like £97 per month Andover soemthinf like £81.

 

[Mercenary Keyboard Warrior]

yeah the terms vary by lender, some will have mortgages that allow draw down, less for more recent mortgages it seems, seems little odd it doesnt affect your LTV but then you could use it to game the system so I guess it makes sense.
IE you couldn't overpay slightly to go from 71% to 69% to gain a better rate, then immediately take a payment holiday to use up the reserve and probably go back over 70%

 

[HangTime]

So, just some basic information on what was offered.
On an outstanding mortgage of £47k I have been offered 10yrs fixed at 2.39%, so paying back £52,920 over the term with £0 upfront transfer costs.
If I was willing to lock in for just 2yrs I could get 1.69% with £1k arrangement fees or 1.99% without.

The question I'm answering as I'm sure many experts are too is what will the interest rate be in 2yrs time - is it worth me saving <1% in interest for 2yrs; but then finding I cannot get 2.39%

The 2yr fix @ 1.69% looks a really bad deal to me because it carries a £1k fee on less than a £50k loan. That's absolutely gigantic, you are stumping up in excess of 2% total loan before you have even started. Generally the lower the loan amount, the less appealing mortgages with high fees become. It's even worse if paying the fee only locks the rate in for a short period because after 2 years you are back to square one and potentially needing to pay fees again or take a product with a higher rate. Even if you were able to pay the remaining 8 years at 1.69% with zero fees (highly unlikely) you'd still end up paying more over the term.

Me personally I would probably go with 10 years as 2.39% fees free is pretty much an all-time low rate, if you plan to stay there long term. You can then just sit back and forget about it rather than having the hassle of switching mortgages again, with worse case scenario you end up spending slightly more over 10 years, but not massively more.

 

[dowie]

The 2yr fix @ 1.69% looks a really bad deal to me because it carries a £1k fee on less than a £50k loan. That's absolutely gigantic, you are stumping up in excess of 2% total loan before you have even started. Generally the lower the loan amount, the less appealing mortgages with high fees become. It's even worse if paying the fee only locks the rate in for a short period because after 2 years you are back to square one and potentially needing to pay fees again or take a product with a higher rate. Even if you were able to pay the remaining 8 years at 1.69% with zero fees (highly unlikely) you'd still end up paying more over the term.

Yeah, I think the comparison is really the no fee 1.99 2 year fix, the £1k fee option can be ignored as a silly option. The 5 year fix for a tiny bit more seems like a better option that the 2 its more of a toss up/personal preference between that and the 10 year IMHO.