Long term Vs Short term mortgage!

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moneypitt

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I think this was asked once before, but I couldn’t find that thread – Is there any advantageous or drawbacks of taking a longer term mortgage, even if the shorter term version is affordable with my current income?

At the moment, thanks to one of the many screw-ups by the bank, I have been offered a 40-year current account mortgage, instead of the 30-year current account mortgage that I originally asked for.

Monthly payment for a 40-year mortgage is almost 160 euros cheaper than the other one, and when I included the difference as ‘monthly pre-payment’ in Karl Jeacle’s mortgage calculator, total interest percentage remained pretty much the same (36.4 to 36.3%).

Mortgage protection on the other hand is dearer (by about 50 euros a year) for the 40-year mortgage.

Trying to understand if I should insist on a 30 yr mortgage or accept the current 40 yr mortgage offer, any thoughts and comments greatly appreciated!

Thanks a million! :)
 
I can't find that thread either right now. The main disadvantages of taking a longer term rather than a shorter term that you can afford are (as you seem to have identified for yourself above):


  • Unless you accelerate (regular and/or lump sum capital) repayments to reduce the effective term below the initially agreed term then you will pay significantly more in interest charges over the lifetime of the loan. The monthly repayments will be less but the quid pro quo for this is higher interest charges over the agreed term of the loan. Of course you could agree, say, a 40 year mortgage but pay it off sooner through accelerated repayments.
  • You will face higher mortgage protection life assurance premiums for a longer term loan. Even if you accelerate the repayments and get, say, a 40 year mortgage down to an effective 30 year term you will still pay out more in mortgage protection life assurance premiums over the same period.
 
I'm no expert, but I'd suggest running your figures through Mr Jeacle’s mortgage calculator again, only this time just reduce the term from 40 to 30 years and see what the difference is on the interest (raw and as a %), rather than using the pre-payments function. I can't believe shortening the term of the loan by 25% would yield such a small saving...

With the same proviso, and all else being equal, I'd have to guess that - unless you're in very unusual circumstances, tax-wise - paying down your mortgage as fast as you can afford to will yield better economies in the long run than any other no-risk investment mechanism.

That said, I'm sure other contributors will quickly ask about your pension arrangements (if any), and whether you have a maxed-out SSIA. These factors should also influence your decision.

In any case, presumably you'd have the option, further down the line, to increase or decrease the term and/or make capital repayments...?

[Edit: Clubman's post crossed mine. But bear in mind that while
you will still pay out more in mortgage protection life assurance premiums over the same period
Click to expand...
- this is also probably about the cheapest form of long-term (reducing) life assurance that you can buy now, while you're young. Whether or not that's a consideration of course depends on your circumstances...
 
Thanks for the comments ClubMan and DrMoriarty. DrMoriarty, I did exactly what you suggested, and here goes:
Case A:

253000 @ 3.29%, 30 years
monthly 1,106.63
real interest 116,515.57
total interest 145,389.21
total interest% 36.49

Case B:

253000 @ 3.29%, 40 years
monthly 948.49
real interest 151,291.38
total interest 202,276.45
total interest% 44.43

Now same 40 yr mortgage with the difference in monthly payment (158.14)as 'pre-payment'.

Case C:

253000 @ 3.29%, 40 years
monthly 948.49
real interest 151,291.38
total interest 202,276.45
total interest% 36.45
inflation 2
And in the prepayment data section:

total interest paid 145,123.48
savings 57,152.97
real savings 34,963.25


Now, total interest paid in Case C is 145,123.48, compared to 145,389.21 of Case A.

That shows that taking a longer term and (strictly) paying off in advance, costs less in terms of interest than a shorter term mortgage! Did I miss something or did I get it all wrong!? Thanks for your time! :)
 
Seems correct to me - in case C you are taking out a 40 year mortgage but paying it off as if it was a 30 year one. The effective term and the interest charged should be about the same in both cases. However you will pay more in mortgage protection life assurance with the 40 year mortgage even if you clear it in 30. The difference may be marginal so there may be some argument for taking the 40 year term in case you need the flexibility and don't want the future hassle of extending the 30 year loan and putting in place additional/replacement mortgage protection life assurance. I know that others differ on this point but I personally would be inclined to go for the shortest term that I could afford and clear it as soon as possible (within reason - i.e. not scrimping just to service the mortgage and not clearing the mortgage only to borrow at higher than mortgage rates soon after). In fact this is what I did having cleared the 20 year term mortgage in about 7 a few years back and having been mortgage free since. The money that I used to pay on mortgage repayments has since been redirected into my SSIA and other regular savings. I have never regretted this and this approach may suit other people too. On the other hand yet other people might have different personal/financial circumstances that merit considering the option of availing of longer term mortgage loans, availing of the (currently) low interest rates on offer and using regular income for other purposes. As ever there are few hard and fast answers that apply in all case.
 
Cheers for posting all the data, moneypitt (not to mention the kind compliments! :D)

Frankly, I'm a bit puzzled as to the outcome but (again), not being an expert, I'm reluctant to cast aspersions on Mr Jeacle’s mortgage calculator's capacities...

However, the reality "on the ground", "going forward", etc. is that your lender will not care a damn for the figures thrown up (...alas!). I'd suggest that you ask them to generate their own projections for the Case A/Case B scenarios, and ask them straight out what the savings would be in a Case B scenario. Ultimately, that's what counts.

Another thought - you quote an APR of 3.29%. That's quite a long way off the best currently available rate of 2.79% (NIB tracker; LTV <60%). Now, it may well be that you'll have a significant (fluctuating) credit balance that will allow all the benefits of a CAM to kick in, and a tax situation to match. But my hunch is that you could still get even better value by going for the best available rate, with the option to make lump-sum capital repayments as circumstances allow. Why not call your local NIB branch and let them woo you over, as the case may be...?* Or - if you're in a situation where you wouldn't now qualify for their best rate (i.e. LTV ratio is not yet <60%), at least make sure that you can switch lender w/o penalty when the day comes...

Once your LTV ratio is <60%, you're in the market for the very best deals available. That's an important bonus, for one so "young" as to be also in the market for a 40-year term ...congrats! :)

(* I just today paid down a significant lump sum myself, and couldn't have found my branch manager more customer-friendly in terms of looking out for my own best interests, as opposed to NIB's...)

[Edit: Once again, Clubman's and my posts have crossed (slack day...? ;)). Crunch the numbers and run the findings past your lender, moneypitt...]
 
Thanks again ClubMan and DrMoriarty!

Well, unfortunately 253K is 92% of the value of the property, (I am buying FTB!!), LTV < 60% is a very distant dream!! Anyway, I have been to NIB before, but failed to impress them, but they were very good to deal with compared to the lot I am dealing with at the moment!

ClubMan, I agree with your rationale there, that’s why I opted for 30 year mortgage when I was discussing my options with the bank, but with days to closing the deal (bank delayed their part for ever), they have send out a 40 year offer, instead of 30! Well, I wasn’t surprised to be honest! Coming back to your point, the difference in basic mortgage protection insurance is only about 50 euros a year (I am not considering critical illness cover at the moment), keeping all in mind, I am now more inclined towards 40 year mortgage, and to pay it off as soon as I can!

Thanks again both of you! :)
 
moneypitt said:
Thanks again ClubMan and DrMoriarty!

Well, unfortunately 253K is 92% of the value of the property, (I am buying FTB!!), LTV < 60% is a very distant dream!! Anyway, I have been to NIB before, but failed to impress them, but they were very good to deal with compared to the lot I am dealing with at the moment!

ClubMan, I agree with your rationale there, that’s why I opted for 30 year mortgage when I was discussing my options with the bank, but with days to closing the deal (bank delayed their part for ever), they have send out a 40 year offer, instead of 30! Well, I wasn’t surprised to be honest! Coming back to your point, the difference in basic mortgage protection insurance is only about 50 euros a year (I am not considering critical illness cover at the moment), keeping all in mind, I am now more inclined towards 40 year mortgage, and to pay it off as soon as I can!

Thanks again both of you! :)
Click to expand...

Just to add a thought to this discussion - while 40 years is a long term (particularly if you are over 30), if went with a 35 year term but made overpayments i.e. instructed the bank to pay in €X00 extra each month then you could achieve the same effect as the 30 year mortgage in terms of paying less interest, but with the important distinction that if your financial situation changed i.e. you found yourself short of cash for a year or whatever, you could stop the overpayments for a period and free up this cash. This would be easier than having to renegotiate or lengthen the term of the mortgage.
 
MonsieurBond, thanks a million for the comment, while I understand your point, I don't see a huge difference in health insurance between taking a 30 yr, 35 yr or 40 yr mortgage (I am 28).

However, considering the quality of service (or the lack of) from the bank so far, I think I shouldn't go back to them to change the term as the closing date is next week! :)eek:)
 
When I was arranging a mortgage years ago with EBS they made a mistake with the term or amount (can't remember which) close to the closure date and it was no hassle to change it. I think that I had originally applied for one amount or term but changed it late in the day but they initially issued the offer with the old details. Unless you are happy to go with the longer term you should get onto the lender and get them to change the offer.
 
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