What logic do I use in calculating the best term (number of years) of my mortgage?

A

Apprecate

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My wife and I took out a mortgage last year. At the time we chose a term of 18 years but to be honest not much thought went into it. I now think this decision was not wise.

Details:
Mortgage: €245,000
Interest rate: Tracker at 0.6 above ECB (therefore currently 3.1%)
Income we can allocate to mortgage and savings a month: €2, 500
Term: 18 years
First time buyers: therefore enjoying Mortgage interest relief @ 25% of interest paid per year

Therefore currently € 1, 481.42 a month goes to the mortgage and €1018.58 goes to savings (currently sitting in a current account! – something I am addressing also).

But would it make more sense to increase the term of the mortgage to the max (even going interest only) i.e. 40 years?
This would mean that I would only have to pay € 891 a month on the mortgage at 3.1% interest and then I could invest the remainder €1691 into a regular saver account at hopefully above 5% interest.

My confusion… would changing the mortgage term to the max possible be a false economy in the long run as obviously I then have to pay monthly mortgage repayments to the bank for 40 years instead of 18!

Can anyone offer advice? My Excel and maths skills are not capable of working this out. I am aware that DIRT at 20% on interest gained is also a factor in all this.

Many thanks
 
Re: What logic do I use in calculating the best term (number of years) of my mortgage

Try Karl Jeacle's mortgage calculator to see the total cost of any particular mortgage over its lifetime. You can then try to factor in potential interest returns on savings to see what mix of mortgage (term) and savings might suit you. However I would imagine that in general the best (i.e. most cost effective) mortgage term is the shortest possible. Don't forget to factor in mortgage interest tax relief and mortgage protection life assurance premium costs. Also - DIRT is now 23%. Have you considered making regular accelerated repayments with some of the spare cash and maybe saving/investing the rest? Extending the mortgage terms and/or going interest only is effectively borrowing to invest/save which is generally not a great idea.
 
Re: What logic do I use in calculating the best term (number of years) of my mortgage

Why would you increase the term of your mortgage? and go interest only?

I know your trying to maximise interest relief and probably benefit from some of the good saving rates on offers with banks at the moment, but your first priority should be to clear the mortgage, not leave it hanging over your head for longer.
You could instruct your bank to over pay you mortgage each month, so the extra 1k per month could come off your capital. Whatever you do, dont do anything that loses that good tracker your on.
 
Re: What logic do I use in calculating the best term (number of years) of my mortgage

Apprecate

I have not checked your calculations, but your principle is correct.

There is absolutely nothing wrong with interest only mortgages.

The figures given, by law under the Consumer Credit Act, and often quoted by jouralists of "total amount repaid" is absolutely meaningless.

Your case is a prime example.

Let's assume you have an interest only mortgage.

And you have €1,000 of savings to spare.

Which is better for you to put that €1,000 into a savings account paying 3% or a savings account paying 5%? The clear answer is the one paying 5%.

Paying off a mortgage costing you 3% is the same as saving at 3%.

The extra advantage you have is that you can access the money if you need it.

In case anyone is worried that you will have a mortgage forever... The savings at 5% will rise quickly and you will be able to pay off the mortgage early.

Brendan
 
Re: What logic do I use in calculating the best term (number of years) of my mortgage

Agree with Brendan - but just one problem I do forsee. Would the bank still grant you the excellent rate you are on for the mortgage if you increased term and went interest only?
 
Re: What logic do I use in calculating the best term (number of years) of my mortgage

Mortgage protection life assurance for 40 years will also cost (probably a lot) more than for 18 years.
 
Re: What logic do I use in calculating the best term (number of years) of my mortgage

Brendan said:
In case anyone is worried that you will have a mortgage forever... The savings at 5% will rise quickly and you will be able to pay off the mortgage early.

Brendan
Click to expand...

This assumes that people uses the reduced repayments to invest in an investment tool that will allow for the principle to be paid off. If people "eat in to" this and use the money to fund lifestyle then surely interest only is only fools gold. Also, how can you be sure that the investment will pay off the principle. For Example, if you had been putting €1000 for the last year in Anglo Irish Bank shares you would have nothing for your money.

I think you have to be very disciplined with your finances to take this approach. As one of the most indebted countries in the world we have had no discipline over the past few years so i doubt this strategy would suit most.

Plus you can't assume that banks will allow you to do this anymore which means your financial situation and record will need to be impressive.
 
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