How long should I take out a mortgage?
The best length for a mortgage
The following article imagines a conversation between a mortgage advisor and a first time buyer. The discussion highlights the pros and cons of taking out an extended term mortgage:
A discussion between a mortgage advisor and a home buyer
Mortgage advisor: I recommend a 25 year mortgage. That will work out at roughly £1,600 per month.
Home buyer: why can't I take out the mortgage over 40 years?
Mortgage advisor: well you could. However, you can afford the mortgage over 25 years so why would you pay it over 40?
Home buyer: I can afford the mortgage easily over 40 years, can reasonably afford it over 25 years, and could just about afford it over 15 years. The monthly repayments would be £1,200, £1,600 and £2,000 respectively. Life would be a lot easier if I didn't have to spend as much of my disposable income on the mortgage repayments each month.
Mortgage advisor: but don't you realise you could pay your mortgage off 25 years earlier if you went for a 15 year mortgage or even pay it off 15 years earlier if you went for a 25 year mortgage.
Home buyer: that may be true but this is the first property that I'm buying. I'm likely going to have to remortgage anyway to buy the next property so why not borrow as much as I can now whilst interest rates are still at their historic low (early 2016 at 0.5% base in UK)?
Mortgage broker: because you'll own more of the property when you come to sell so will release the extra equity that you earned when paying the mortgage over a shorter term.
Home buyer: but surely I could set the extra money aside. My intention is to build up the additional cash and invest it in another property. That way the cash isn't tied into a single asset.
Mortgage advisor: that sounds reasonable. But honestly, do you really want to be committed to a 40 year mortgage?
Home buyer: of course not! Would anyone, but there are several ideas going on here:
1) I am young (under 30)
2) I'm likely going to be working for at least 35 - 40 years
3) I'd like to borrow more and buy the best property that I can possibly afford without killing my finances and whilst I am on the smallest income of my mortgaged life
4) I want to fix the initial term for 5 years after which if I'm earning more I can remortgage the property to pay it off in 10 years (making it a 15 year mortgage in reality)
5) most mortgages allow you to overpay the mortgage by 10% of the original borrowed amount. As such, if I wanted to I could overpay by the full allowable amount anyway every year and effectively have an 8.5 year mortgage if I really wanted to
6) if I overpay on my mortgage (easier to do if you don't have to pay out as much to begin with) and then suddenly find myself out of a job. I can cut back on the mortgage payments altogether if I wanted to, up until the point that I have brought down the overpayment balance to zero
The point is that taking out a 40 year mortgage gives me tremendous flexibility that I couldn't have if I commitment myself to a 15 year mortgage. Thoughts?
Mortgage advisor: ever thought about becoming a mortgage broker?
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