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.

Yes, that's true in terms of what lenders will let OP borrow, but those calculations are done on what "average people" spend. It is possible that the OP has different spending habits from the "average people" used in the calculations.
Or that she has the time and opportunity to do overtime.
Or that she isn't interested in holidays
Or that she is going to do a 2nd job one evening a week
Or that she isn't into buying new gadgets or clothes or whatever else "average spenders" spend their money on.

This is more about what she should do with the £200pm she calculates she has available.

@SoEmbarrassed2024

You can't compare one year of savings to reduced interest over a 23 year term (presuming your calculator was impact of 10k lump sum over a 25 year mortgage).

Think of it this way: if you invested 10k today in a savings account making 5% per year, in 23 years after compound interest it would be worth £30.7k (£10k × 1.05^23). It makes no difference (if savings rate and mortgage rate are the same) to the outcome on your finances, it's either reduced your mortgage by the same amount or is sat in a savings account.

Admittedly, thats not entirely true as there are tax implications on interest made but personally I'd much rather have the money in an account which I have access to and have slightly less money. Another factor to consider is whether you are good at saving, and of course the mortgage rates available vs the savings rates available.

@YourGreenDreamer

Remember you don’t have to use a broker.

property is 210k, deposit i'll pay is 24k. not keen on paying anymore as it'll eat my reno money.

will definitely overpay

Ignore the broker, getting into the habit of over paying is a great thing.

This, it’s shockingly bad advice, you’ll pay a vast amount more over your lifetime if you follow this advice. Check out the MSE mortgage forums or Reddit’s UK Personal Finance pages. Your broker is screwing you over and almost certainly walking away with a fat commission, and will do it all again when your 2 year fix is up.

thank you very much, would appreciate that

When I bought my first house, I got a term of 35 years and I overpaid straight away on it. That was 8 years ago, and we are on target to get it it paid off by 2027 (11 years in total).

Oh I see bow it's a 2yr fix deal but you are doing a 40yr term.

My only concern is if your really selling in 2yrs you'll only be paying the interest off mostly so won't have much flexibility in having equity to use to buy your next home

It's good to hear your shopping around even just a second opinion helps

That part is true. You are only fixed at that rate for 2 years and then you will remortgage and take out a new fixed rate which is likely to be cheaper with a lower interest rate.

Please don’t get too alarmed. I don’t agree with everything this guy told you but equally, he isn’t completely wrong either in that you are only locked in for 2 years and the 40 years can easily be reduced further down the line. It seems that his main goal was to make your repayments as low as possible so he may have got the wrong end of the stick if that wasn’t what you wanted.

I also think it’s likely that the £295 was an arrangement fee payable to the lender not the broker but you can check that with the broker.

It’s normal to pay an arrangement fee when you take out a new mortgage (not when you remortgage with the same lender) & you will probably still have to pay an arrangement fee even if you use a free broker like L&C. Though I do advise you to contact L&C today to see if they can find you a better deal or at least explain things better to you.

If you can get over 4.89% on you savings it would be worth putting the money in a savings account. When I bought my first house I did overpay ever month. When I went to remortgage I dropped into a lower LTV bracket so I saved money and then 2 years after that I bought a bigger house.

I wouldn't have got a 40 year term. Even at 28 that's crazy. Can you overpay?

Overpay if you can, makes a big difference overall. Only exception is if you can get a a really high savings rate but it would need to be decent to make a difference

Thankfully this deal is only 2 years long, ideally overpay/save and when you negotiate a new deal after 2 years you can reduce to 35 even 30

No it's not terrible advice. For the amount of money that is available/being used to overpay it will earn more interest if saved then applied to the mortgage after 2 years than it will if overpaid straight away, if you can save it at a higher rate.

For the OPs mortgage rate, the difference will be small, because savings rates aren't that much above 4.89%. But if the difference was higher, eg for those people who still have low fixes of 1/2%, it can be thousands of pounds. The mistake people make is looking at the saving on the mortgage over the whole term, but only considering the extra savings interest in the early stages. You have to compare like with like and when deciding whether to overpay or not for any particular amount of money, it's simply a matter of comparing the relative interest rates, taking tax into account if applicable.

But having said all that, 2 year fixes can add quite a bit to the effective rate. But it does depend on whether you want to tie yourself in for longer, which is the risk if your circumstances change or mortgage rates decrease. But you can usually transfer a fix if you want to move house, so that's less of a concern.

Brokers can be useful if you have non standard circumstances, eg stretching income multiples, adverse credit history, self employed, but if these factors don't apply, you can use free online brokers and just search using Moneysupermarket etc - some lenders/products only accept direct applicants and don't go through brokers - remember 'free' brokers have to be paid for somehow, and this cost will be added to the products whether it's built into the rate or as fees paid to the broker.

This sounds bonkers. You will be essentially just paying interest for the first two years and the likelihood is that the value of the house will have fallen rather than risen. Depending on your deposit level, you could even be in negative equity. I would find another good broker or several others. If this purchase is such a financial stretch for you, should you really be buying now? What is your current housing situation and your job/ your partner's job? A short term house for a FTB is not a good idea at present.

Every single penny of your overpayment will go towards reducing the capital i.e. the amount you borrowed, so you'll be paying less interest in the long term.

Circumstances change, what you plan now may not be what happens in future, so if you prefer to overpay monthly, do that instead of a lump sum at the end of the fixed term.

I've got my overpayment going out at the same time as my usual mortgage payment, so I don't miss not having that money at all.

Broker sounds like he's focussed on his commission, and counting on you being back in a couple of years to remortgage with him again for pretty much the same amount.

Mortgage brokers arrange mortgages. They aren’t financial advisers. Their job is to get you a good mortgage product. That’s all. OP have you got a good product? Is it with a good mortgage company? Is it a good rate?

I mean he's a mortgage broker, not a financial adviser. Feel free to ignore his advice!

The product doesnt sound that bad with a 10% deposit, so just take it and trrat it how you want. I personally alwaya overpay, and I'd especially want to if my term was 40 years

They are mortgage advisors though! Ie qualified to talk about mortgages which is potentially something financial advisors aren’t, depending on the exams they sat and their registration

theres A lot of misinformation on this thread.

brokers have access to a portal which may have different rates than available on aggregator sites, there is use for a broker but see more than one and avoid ones with a fee

I've always used a broker (self employed). We have a 35 year term so that we have low minimum monthly repayments, but then overpay as much as possible. We are projected to pay off the balance in 10 years by doing this. But if something goes wrong and our earnings drastically reduce, we can stop overpaying and it's much more affordable.

With interest rates as they are, long term + high overpayments is the best strategy to reduce the balance while reducing risk. Shortening the term has no benefit other than meaning you are committing to pay a higher monthly repayment (and if you fail to do so, you could default).

Check the T&Cs of your deal - most allow you to overpay a max of 10% of your balance each calendar year. If you are reaching that limit, put the extra in a savings account and use it when your fix is up to reduce the balance.

@YourGreenDreamer Your marginal tax rate, disposable income, capital expenditure plans, emergency savings and pension status are all relevant in deciding whether to overpayment and mortgage spec you will benefit from.

Sounds to me like you should be looking at an offset mortgage which will allow you to offset every single penny you have against the capital outstanding but give you access to that money as you need it for your renovations. Your high LTV needs to reduce but you need a flexible solution to maximise your ability to overpay without cramping your reno plans.

Your broker probably thinks you are unusually serious about financial management for your age. You are! So was I, and it has served me very well indeed.

He is talking bollocks. The.more you overpay, the less you pay in the end. It's simple. Add up your total repayments over the 40 years. You'll be shocked.