my mortgage broker says i should enjoy having a low monthly repayment on a 40year term, 2year interest fix and not worry about overpaying my mortgage. is he right?

[YourGreenDreamer]

I'm (27) in the process of buying my first house.

Broker put me on a 40yr 4.89% fixed rate. Monthly repayments will be £890p/m

Made myself feel better about the 40yr term by vowing to overpay my mortgage by at least 200p/m. Not ideal, but doable. especially as a serial saver.

Broker has told me to stop worrying and enjoy having a low monthly repayment as I'll probably be out of the property in a few years, won't be on the 40yr term forever, i'd have made some profit from selling and will be on another mortgage deal in 2 years. it's not my forever home and i do plan to sell in a few years but if i don't overpay, would i not risk my second mortgage still being a long term. i don't want to be paying interest until i'm old and grey.

How right is my broker? Should I "enjoy" paying just 890p/m or should I focus on overpaying my mortgage for at least the next two years?

he seems a bit too jovial and it's concerning.

People advising OP to take the loan over fewer years might not realise that ther is a limit to how much she can borrow based on multiples of income. If they wouldn't let her borrow over 30 or 35 years it's for a reason.

Because of the rule of nines. For 9 years the interest has been loaded upfront. The next 9 years you pay more equal amounts of interest and repayment and the last 9 years or less you pay mostly loan repayment and less interest.

Is the advisor paid commission by the lender? If so he will probably be paid more because of the extended mortgage term.
Ask him about this

It doesn't sound like you have a bad product but I do question his advice not to over pay. We have a mortgage that is technically longer than we intend and we are over paying each month - the reason we went for the longer mortgage though is that it doesn't commit us to that payment level so if our situation changed and we couldn't afford to overpay we could go back to the standard amount.

If you are allowed to overpay with this product then it will not only reduce the interest over the length of the mortgage but it could put you in a different LTV (Loan-to-Value) band when it comes to re mortgaging in the future. That means you may be offered better interest rates.

Can you explain why please? The amount in savings would be the same as the extra that would be paid into the mortgage, so wouldn't it be better to put the money wherever the highest interest rate is?

I just put a 10k one off payment into my banks mortgage overpayment calculator and it says I'll save 23k in interest and pay my mortgage off 1 year and 8 months early

I then put a 10k in the BoE borrowings and savings calculator with the same interest rate, and I'd earn £589 a year in interest.

If you have a really low interest rate on your mortgage or a really high interest rate on your savings it may work, but with rates as they are it wouldn't make sense to me to put it in savings (unless there was potential I may need access to the money at some point)

I then put a 10k in the BoE borrowings and savings calculator with the same interest rate, and I'd earn £589 a year in interest.

But you then need to calculate how this compounds over the same time as you would have repaid your mortgage

The more you overpay, the less interest you will pay. Regardless of whether you move or make a profit when you do.

I am very pro overpayment and was mortgage free by 41 on my second house. I wouldn't have been able to afford the second house if I hadn't overpaid on the first one.

It was true for me. I had a mortgage that had a repayment term of 25 years but the "fixed" bit in my case was for two years. So after that I remortgaged without penalty. Thankfully, as rates plummeted in that time.

Thank you very much to everyone who left a comment.

I will be in touch with a new broker for shorter term deals, see if they have better interest rates and just get a second opinion overall. I have a call with L&C tomorrow and I will keep this thread updated when I can as this may help someone else.

This is such a faff as I'm well into the house buying process at this stage.

When it comes round to it I will 100% overpay each month. Ridiculous advice from my broker. Glad to know I'm not the only one who thinks that's awful advice.

Thank again everyone

So your loan is approx £180K.
If the rate remains static, it will cost you £230k in interest over 40 years so £410k on total

If you reduce it to 30 years, it would cost you £954k per month but your interest would reduce to £164k, total 343k in total.

I wouldn't be impressed with your broker on any level.

I'll do the maths later on how much the broker will have cost you within 2 tears if you like.

I would definitely try overpaying.

If he’s right that you probably want to move in a couple of years then that’s all the more reason to overpay - otherwise if you’re barely paying off the principal then you’re at risk of being underwater when the time comes to sell as I assume your deposit is quite small too.

Er yes you can. If op has fixed for two years she can do what she likes after that. Change term, change lender etc. You're only tied in for two years if that's what your fix is.

I think it sounds ok to have a 40 year term as this is only for your 2 y fix. Though you should overpay as you first thought and then when you remortgage bring the term down. It is nice to have the lowest payment and then voluntarily over pay because then if you want to skip a month you can.

It makes sense to go for the lowest interest rate you can get, even if that is calculated based on a longer term, so long as you then overpay to bring the term back down. Playing around with a mortgage repayment calculator is very helpful here. Also worth knowing that some fixed term deals allow you to overpay a percentage of the total amount outstanding which in the first few years of the loan is generally a lot.

It does over time. If you can afford to over pay I would always over pay, even if it is just £50 as that is paying your actual balance rather than interest. Even if you then sell in two years you will have more equity in the house (unless it sells for far less than what you bought it). I would ignore him and over pay.

The term of the loan won’t impact the commission paid , that is from writing the business itself. Tbh the mortgage itself isn’t where the money is, it’s the protection policies

but the brokers point was you aren’t living there long so the term of the loan is obsolete as you’ll be selling and moving on, and as interest is stacked at the front, you’re ‘share’ of the property won’t have increased tremendously in 2 years

@ThirtyThrillionThreeTrees - spreadsheet that does it in a flash is linked up thread.

@YourGreenDreamer have a play with the spreadsheet I linked - it shows the impact of small changes compounding over many years

i would never use a mortgage broker for financial advice. And this illustrates why. They simply do the paperwork around the mortgage deal that you pick.

I significantly overpaid my first mortgage when I was about your age. Stayed in my first house for longer than I expected and therefore had a good bit of equity built up. If you can afford to overpay your mortgage and don’t have more expensive debt then do it.

this mortgage advisor is giving lifestyle advice not financial advice.

Is there any chance that what he meant was don't stress about overpaying to reduce the term? To stop you worrying about the 40 year as it is likely to change after the fixed rate and if you sell.

OP I wouldn't worry about the actual deal- for a FTB it sounds OK and you can do a quick price comparison online.
But definitely ignore him and overpay if you can. He's being odd and overstepping by advising you what to spend your money on. And possibly thinking that if your equity is higher through overpaying you'll be less likely to 'need him' in future as you'll have a better choice of deals with a lower LTV.

You'll end up with exactly the same in the bank if you put those overpayments into a savings account and stick it in a 5% interest account.... I'd rather have the savings to hand that put it into a mortgage and no longer have access to it.

Overpaying is sensible. And as long as your overpayment limit it above what you realistically expect to be able to overpay on the fixed term, a longer mortgage term is actually better, as you are only committed to paying a lower amount.

So (fake numbers for illustration)...
Assuming interest rate is the same, a 40 year mortgage with a £800 minimum payment plus overpaying £200 a month is better than a 30 year mortgage with a £1000 minimum payment.

Either way you are paying the same amount each month, so will repay in the same time (30 years) BUT with the longer term and overpayment should you have a financially difficult month (big repair bill, sickness affecting earnings etc) you can skip the overpayment that month freeing up cash (though nudging back your redemption date ever so slightly). It just builds that extra bit of flex in your finances.

With yours the longer term is lower rate, so makes even more sense to choose it.

Of course you can review each time you come to the end of a fix and renew your mortgage too.

we overpaid our mortgage by the amount that they allowed monthly and saved for the yearly allowance. We paid off our home in 9 years , of a 25 year mortgage. The more you pay it down, the less interest you pay.

But if you put £10k in a high rate savings account (say 5%) and your your mortgage rate is lower than that (say 1.5%) it makes loads of sense to out that money where it earns more until the time the two even out. At that point you take it out of savings and overpay.

You can only look at that 10k in isolation, not as part of a wider mortgage as it’s comparing apples and oranges.