Paying off your mortgage over 15 years could save you £200K!
Or on the irrationality of longer term mortgages.
The average mortgage term in the UK is now 30 years. 41% of mortgages now have terms of over 25 years compared to just 14% before the pandemic( LinkedIn article 2023) and 26% of home movers took out mortgages on 31–35 year terms in 2022. (The Guardian).
The trend towards longer term mortgages can be explained by increasing inflation pushing up living costs, but also increasing interest rates pushing up the cost of borrowing.
Borrowing over the longer term does reduce your monthly mortgage payments compared to a shorter term, enabling you to have more money every month to meet your needs and wants, but the increased cost of borrowing over 35 years compared to say 25 or 15 years is extreme.
To illustrate this let’s look at how much it would cost you over 15, 25 and 35 years to pay back an average first time buyer mortgage at today’s interest rates.
According to Money.co.uk the average first time buyer mortgage in the UK in December 2022 stood at £256, 220 in the South East. (The most expensive area is, of course, London, but I’m just ruling that out as being beyond the reach of most ordinary humans!)
According to Which the cheapest no-fee first time buyer mortgage rate with a 10% deposit was 5.5% fixed for five years with Nationwide, in September 2023.
The rates are ever so slightly cheaper for 15% deposits (or 85% mortgages) but to be as inclusive as possible for our southerners, I’ve modelled my repayments based on the 10% deposit, which would be £25K in the South East, still a hefty sum to save up!
Running these figures through a basic mortgage calculator yields the following results:
Or in more graphic terms
So comparing £256K over 15 years to the same amount over 35 years at 5.5% interest you are going to pay back an extra £201K on that original sum if you spread the payments over an extra 20 years.
Yes, you may well have an extra £700 a month to spend, or around £8K a year, but you lose MORE than that in the extra interest payments over those extra 20 years!
So the rational approach to my mind is the pay down the damned mortgage as quickly as possible
The only reason to NOT pay it down is if you have a strategy where that extra £700 a month is being leveraged to make you more than your mortgage interest rate a year, which would be fair enough.
But if you’re just easing up on mortgage repayments to give yourself a few hundred quid extra for doughnuts or whatever other frivolous jollies you may want, it’s a VERY expensive way to free up some money for immediate gratification.
Of course back in the day people could rely on ever increasing property prices to be their investment that offset the cost of longer term mortgages, then after that the interest rates were so low rapid repayment didn’t really matter.
However today I don’t think we can rely on either of those things: so maybe it’s time for less doughnuts and get that mortgage paid off in 15 rather than 35 years!
If, of course, you can afford it!
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If you need 30y mortage for you house maybe buying a house isn't the best idea
Fair point indeed or just carry on saving for longer!
Here it is 5, 10 or 15 years. We wouldn't want to pay a debt for 30 years :) However, banks are reluctant to give mortgage nowadays and if you are eligible, you can get just almost 1/3 of the loan you need.
It's certainly becoming tougher!
Shorter is always cheaper and I would hate to have a 35 year mortgage on my hands. What a terrible life to lead and happy I am not mixed up in that now. I have two mortgages with one due next year and another in 15 years, but will sell long before then. Always stuck with a 20 year home loan.
20 years isn't too bad!
We overpaid our mortgage for years, but it still would have lasted a while if we hadn't gained the funds to pay it off this year. It's not so easy when you have lots of other stuff to pay for. You have to decide what sort of life you want. You could live really frugally and get an extra job for a few years or you can just pay the extra and live 'normally'. It's even harder as interest rates and property prices go up.
My parents' first house around 1960 cost about £2000 and I think my dad made about £600 per year then. Now the ratio is much worse with a house costing around ten times your salary.
I really don't know what my kids will be able to afford unless they move to a cheaper area. If you can work remotely then you can save a fortune by buying in areas where a house can cost a fraction of the price of a London flat.
We get one life and have to make the best of it.
It's unfortunate that many people have no option other than to go for a 30 year term - the real diff is between 25 and 35 years - you save 250/ month but that costs you £100K over those 10 years - ouch!
Those figures for your parents just sound bonkers by comparison!
More house buiding would help too - that's a polcy thing!
I'm glad you added the caveat about if you leverage to invest.
I could have paid off my mortgage 3 years ago but instead I'll be waiting 7 more years.
Why?
My Mortgage is locked in 10yrs @ 2.79% and I can get 5.69% on a GIC. Sometimes....just sometimes....It can make more sense to invest than pay off early.
Sometimes those investments are in family moments. If the saved money allows you to "spend" more time on family moments then again I'll say its worth the lost cash in the long run.
If its just doughnuts, new car, or worthless crap then I agree. Dont go for the extra time in debt
You did well with the 10 year fix, I went for five on 2% (!) Ended last month, remortgage rate was 5.5%, thankfully the amount is so low now it doesn't matter.
But fair point RE quality stuff.
I went 10yr fixed because I also set my payments to coincide with 10yrs and done. 1.99 5yr looked better and my wife was upset with me for paying the 2.79 .... but this is actually one of the very few fights I won with her 🤣
Glad your 5.5% isn't killing you. So many people around here are looking at 5.5 - 6% with a whole lot of worry. It's pretty sad.
Ah that's interesting! I'm going to work out the relarive difference!
I've only got £35K on my mortgage it's not so bad even reverting from.1.99 to 7% my payments were only £50 more a month. Reading news articles if you've got £100K yr looking at hundreds of pound more. Amazing how it scales.
And with 5% being offered on some savings accounts now... my 5.5% deal is OK!
The situation is a little different where I live. The average house sells for about 1.3M Cad (780,000GBP) and the average mortgage rate went from 1.99% (0.9% variable) to 6%. The interest on a typical mortgage is easily 60,000 CAD and median Canadian wage is less than the interest alone.
For some people the only way to stay in their home is to talk to the bank and pay interest only until things improve. Then again for those who have money they can get a 5.69% interest on a guaranteed investment.
Great for savers, not great for mortgage holders.
Those are some expensive houses! Interest only is not a great option!
Sometimes its picking the lesser of two evils.
The housing situation here in Abbotsford (Vancouver) is straight up bad. We have the most expensive housing per income in North America. The rental situation is worse. My son is a tradesman making good money ($60K/year) and hasn't been able to find even a room for rent after 3 months of looking. My wife is a nurse and one of her co-workers making $110K/year is living in her parents house because she can't find a place to live.
I'm sorry if I'm boring you with my responses but it's a topic I'm passionate about. I wrote an article about it here. Well, the article is unfinished but I put the bulk of it in the bottom of that post.
Quick version. Interest only is a terrible option but it beats being homless. Interest only is kind of like renting from the bank but with no rent guarantees and you have all the ownership expenses.
I agree with your original premise. Paying down your mortgage is a VERY GOOD IDEA for almost everyone. But there are a very few exceptions :)
Image above is one of the many homeless camps near where I live.
I didn't realise things were so bad in Vancouver, do you have very restrictive planning laws?
I mean one thing Canada has lots of is... LAND!
I could write a very very long response but I'll try to be brief.
Yes. Canada has lots of land. If you are flexible where you live I know a beautiful little town where a small house on land can be had for 30,000 pounds. More in ready with good neighborhood, friendly community, safe, crimefree with good schools and hospital. Even decent jobs available.
Unity, Saskatchewan. I know this because I own land there and my sister lives there. My son will also be moving there (well an hour away where the university is) because he CAN start a good live there.
However like much of Canada the winters there aren't great.
Vancouver had the best natural views and warmest winter. It had the most "things to do" and all the amenities you could want. As such everyone wants to be here (or Toronto as business center or Montreal as cultural center etc).
Vancouver is totally surrounded by mountains. Can't build there. Has valuable farmland to feed the people. Can't build there. And unfortunately a lot of CAVE people whose motto is Can't build there.
If you don't know Citizens Against Virtually Everything (CAVE) people.
Add pressure from immigration (Britain know.something about that I think), a lack students following trades, strict building codes....
And voila. Housing nightmare.
Sorry I keep this chain going but you keep posting such awesome responses ;)
I get you - I did visit Vancouver in the 90s loved it - I can see why it's popular like London I guess - we call them NIMBYs - not in my back yard!
The rational approach is to disadvantage yourself to live with others that will have you for help around the lot and make payments, same as a mortgage, to an account you do not touch. Then, in 10 to 15 years, buy a property across the board and pay no one interest and immediately owe nothing more than taxes and maintenance till you sell the lot. A true Capitalist never borrows what he does not already have, and then so only to cover his taxable income.
I think that cheap shared rental thing is looking more attractive, then buy outright or nearly as you say, decent strategy!
I'm all for it!
I had a repayment mortgage with Nationwide that I could overpay and I made good use of it to get rid of it as quickky as possible. No doughnuts for me.. lol
Good on you, I'm so glad mine is almost DONE!
Paying off a mortgage quickly can indeed save a significant amount in the long run. Financial planning is crucial
Faster is better, all other things being equal, although I guess if you get a rate close to the savings rate, it's not so bad!