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peter_2008

Is 40 years mortgage really a bad deal?

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A question.  

Say I have a deposit of £25K, and borrow £250,000 at 3% to buy a £275k house.

I CANNOT afford a 25 years mortgage at a monthly payment of £834 (capital) + £352 (interest) =  £1,186

But I CAN afford a 40 years mortgage at a monthly payment of £521 (capital) + £374 (interest) =  £895

In the short term, the monthly payment is almost £300 (25%) less. That’s a big difference for a lot of people.

Now, in theory, over the long term, obviously it will cost me a lot more, if I am to pay it off over the full 40 years.

But, say if I just start with a 40 years mortgage, and run with it for 5 years. That means my equity increases by £521 x 12m x 5y = £31,260.

Also assuming that property price goes up a modest 10% over 5 years. The house will be worth just over £300K after 5 years. So that adds another £25k equity. That's give me £25k (initial deposit) + £30k (capital repayment) + £25K (house price increase) = £80k equity after 5 years

At this point, my 5 years fixed rate mortgage deal come to an end and I switch to the normal 25 years mortgage. My equity increases from 9% (25k/275k) to about 26% (£80k/£300k)

So all I have to do is to pay some meagre additional interest over 5 years at £22 x 12m x 5y = £1,320! That's nothing compared with what I gained over 5 years.

Am I missing something here? Because it looks like it makes perfect sense for everyone to get a 40 years mortgage???

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5 minutes ago, peter_2008 said:

A question.  

Say I have a deposit of £25K, and borrow £250,000 at 3% to buy a £275k house.

I CANNOT afford a 25 years mortgage at a monthly payment of £834 (capital) + £352 (interest) =  £1,186

But I CAN afford a 40 years mortgage at a monthly payment of £521 (capital) + £374 (interest) =  £895

In the short term, the monthly payment is almost £300 (25%) less. That’s a big difference for a lot of people.

Now, in theory, over the long term, obviously it will cost me a lot more, if I am to pay it off over the full 40 years.

But, say if I just start with a 40 years mortgage, and run with it for 5 years. That means my equity increases by £521 x 12m x 5y = £31,260.

Also assuming that property price goes up a modest 10% over 5 years. The house will be worth just over £300K after 5 years. So that adds another £25k equity. That's give me £25k (initial deposit) + £30k (capital repayment) + £25K (house price increase) = £80k equity after 5 years

At this point, my 5 years fixed rate mortgage deal come to an end and I switch to the normal 25 years mortgage. My equity increases from 9% (25k/275k) to about 26% (£80k/£300k)

So all I have to do is to pay some meagre additional interest over 5 years at £22 x 12m x 5y = £1,320! That's nothing compared with what I gained over 5 years.

Am I missing something here? Because it looks like it makes perfect sense for everyone to get a 40 years mortgage???

Makes sense IF assumptions hold true. 

We went 30 years but that was because other half want qualified. In the meantime our combined earnings have increased by about 23k/ year.

Provided you can reasonably expect salary increases then it's fine but i did all my modelling assuming prices fell at 2% per year. 

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This question answers my question as to why house prices have risen in the last few years? 40 year mortgage? It would be cheaper to get an 80 year mortgage. Problem then being the 275k house  will become a 350k house because of the affordability of the mortgage. 

To answer the op, your figures fly out of the window when interest rates rise.

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Multi-generational mortgages?....not that different to IO mortgages, equity withdrawal or withdrawing equity debt as an income.......all it means is continuing renting/paying interest only/paying capital for longer.....can work but works out to be more expensive over time......lenders do not make money from people who repay debt they love long-term low risk debt with a higher interest rate, the extra charge for flexibility......very many borrowers would jump at the chance of a higher cost but a lower monthly payment that may or may not extend for many years even to the next generation.;)

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Im wary.

Basically, the longer the mortgage runs, the more you pay in interest.

Find a mortgage calculator and see who much more those years costs. In simple terms, once you go over 25 years, the extra interest becomes painful.

The only case Id see a 25+ mortgage being viable if you expect household income to go up a fair bit - or a lump sum in the near future. Then you start overpaying the mortgage by, say, 5% a year.

Having a shorter term mortgage means the pain of paying the mortgage falls away quicker.

 

 

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2 minutes ago, spyguy said:

Im wary.

Basically, the longer the mortgage runs, the more you pay in interest.

Find a mortgage calculator and see who much more those years costs. In simple terms, once you go over 25 years, the extra interest becomes painful.

The only case Id see a 25+ mortgage being viable if you expect household income to go up a fair bit - or a lump sum in the near future. Then you start overpaying the mortgage by, say, 5% a year.

Having a shorter term mortgage means the pain of paying the mortgage falls away quicker.

 

 

Of course paying it for longer will cost more even allowing for inflation, future interest rates will see to that......but for many it is this month's money that is the focus....... tomorrow never comes.;)

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Also the value of your debt will trend to zero as sterling continues its trend to zero value. Especially when your talking about time periods like 40 years. 

buy there is a whole lot of ‘ifs’ and ‘buts’ in what can happen even in the near future. 

I only took on mortgage debt once I was hedged in other asset classes.

so if a whole combination of factors hit me, and I lost the house, I would still have substantial money elsewhere, especially in asset classes which would react opposite to house prices and/or interest rates.

if the whole system went into reset, I could still have the ability to buy my next house anyway. 

things are bumping along at maximum price at the moment, lending is still lax, people are not really earning more, boomers are starting to shed their mortal coil, stuff is not really selling at last years asking prices plus 5-10% anymore. Houses prices may be stagnant for years. Interest rates don’t appear to be going down, the tightening cycle did start, but who knows if that’s on pause. 

are stock markets going to finally roll over after 11 years of growth? certainly time for a recession/bear market. Who knows?

But the quality/size of new-builds is soo poor that anything new is just creating more and more demand for houses which are actually fit for purpose. House prices are not just everything goes up or everything goes down, that’s not the dynamic when the only new stock is shockingly bad. there is no more supply of good houses and has not been for 25 years. just because a period property doubled in price in a short period of times does not mean a new build would do the same. 

your asking if you should take a gamble as you can’t really afford the debt. Historically that gamble has paid off more than it has lost. but it is still a gamble. does the house has value? Is it a good quality large older build? Or some crap shitebox in a new build soon to be sink estate? 

Is your pay trajectory looking good moving forward?

Are you loosing any opportunity cost moving forward? 

would the place suit your needs if you end up trapped there? negative equity for 20 years?  

is your whole life’s labour worth the house your looking at? 

i could never understand people who could bear to sign themselves up for ex poverty hovels just 30 years ago, and pay their whole lifetimes labour for something even the lowest rungs of society could afford in living memory. 

Do you feel pride in having a house and paying for it. would you stand back and say ‘this is worth x amount’ this is worth the hours at work 

could you keep paying the mortgage if you leave work ill or get depression or stress? could you have an emergency fund for roof leaks etc? 

its wonderful having a home and the illusion of security I have to admit. but also common sense would say that if you need mortgage terms of 40 years to afford it, then you can’t really afford it, if you can still buy with a 40 year term, then the days of lax lending are back, and lax lending only leads to instability, as people start buying on the expectations they will be bailed out by rising prices, (just like you) and that’s usually just at the point when the greatest fool is in, and things start to drop. 

if I were going to take that gamble then I would have £10k gold or cash etc, on the proviso that it all works out with the house, happy days, or you lose the house, sod the corrupt banks, let them write it off, bide your time a bit. Then buy at the bottom. 

the rich get rich by buying distressed assets.

Ask yourself this, are you a mug? or are you the kind of person who does make the correct decisions in life? are you successful? do you trust your logic? are you likely to be making a good decision here? historically do you make good choices?

Edited by jiltedjen

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How many years full time work does the average person work for?...... 40?

How many years of work, paying a regular income that only goes up is required?......40?

How many people's monthly working wages does it now take to buy a house?

How long does it now take to buy a house?

What about the deposit?......how many years to save for that?;)

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Don't go beyond 25 years. That sort of action is part of the reason prices are so stupid now.

Before that:

  • Cancel the gym membership
  • Stop visiting coffee houses
  • Drop the mobile contract
  • Stop buying labelled clothes (apart from shoes)
  • Downgrade the motor
  • Cancel the ski holiday
  • Switch to Aldi and Lidl
  • Cancel Sky Movies and Sports
  • Cut out smoking, alcohol, drugs, gambling and women

You'll soon be able to afford a 10/15 year mortgage!

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5 minutes ago, micawber said:

Don't go beyond 25 years. That sort of action is part of the reason prices are so stupid now.

Before that:

  • Cancel the gym membership
  • Stop visiting coffee houses
  • Drop the mobile contract
  • Stop buying labelled clothes (apart from shoes)
  • Downgrade the motor
  • Cancel the ski holiday
  • Switch to Aldi and Lidl
  • Cancel Sky Movies and Sports
  • Cut out smoking, alcohol, drugs, gambling and women

You'll soon be able to afford a 10/15 year mortgage!

All of that and more......get a friendly trustworthy working lodger, that allows them to save a deposit of their own.....win,win.;)

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You’re better off getting a 130% IO mortgage

 

those things are like gold dust, but if you find one... go balls deep like it’s closing time my friend 

 

no pesky deposit to worry about, no unreasonable  “repayment” term, just a big fat truckload of juicy DEBT to chew on 

 

delicious 

Edited by thewig

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2 minutes ago, thewig said:

You’re better off getting a 130% IO mortgage

 

those things are like gold dust, but if you find one... go balls deep like it’s closing time my friend 

 

no pesky deposit to worry about, no unreasonable  “repayment” term, just a big fat truckload of juicy DEBT to chew on 

 

delicious 

Enough to make you sick.;)

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38 minutes ago, micawber said:

Don't go beyond 25 years. That sort of action is part of the reason prices are so stupid now.

Before that:

  • Cancel the gym membership
  • Stop visiting coffee houses
  • Drop the mobile contract
  • Stop buying labelled clothes (apart from shoes)
  • Downgrade the motor
  • Cancel the ski holiday
  • Switch to Aldi and Lidl
  • Cancel Sky Movies and Sports
  • Cut out smoking, alcohol, drugs, gambling and women

You'll soon be able to afford a 10/15 year mortgage!

:lol:

25 minutes ago, winkie said:

All of that and more......get a friendly trustworthy working lodger, that allows them to save a deposit of their own.....win,win.;)

A highly considerate idea. :) Got to think about the next generation of mortgage slaves owner occupiers. ;)

The housing market has been atificially stoked up over the last 20 years so the best coping strategy is to least have a sense of humour about it. :D

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3 minutes ago, MattW said:

:lol:

A highly considerate idea. :) Got to think about the next generation of mortgage slaves owner occupiers. ;)

The housing market has been atificially stoked up over the last 20 years so the best coping strategy is to least have a sense of humour about it. :D

Actually you can live a content and healthier life by going without many of life's quick fixes, instant gratification sometimes later to regret.....anyway by the time the deposit has been saved and or invested in other things, next time might be able to buy a lot more for it somewhere better.....live longer enjoying it.;)

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Recent low rates are an anomaly, rigged to get you to overpay and keep prices inflated. Plus interest rates don't stay the same for 40 years. I struggle to understand how anyone can even begin to make a decision based on such a rigged market let alone calculate all their future chickens.

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You could say low interest rates work for different people.......one would say they can pay less and borrow more, another an opportunity to overpay and get debt free, others will always pay back as little as possible, use the extra money to live better today..... ;)

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9 hours ago, peter_2008 said:

A question.  

Say I have a deposit of £25K, and borrow £250,000 at 3% to buy a £275k house.

I CANNOT afford a 25 years mortgage at a monthly payment of £834 (capital) + £352 (interest) =  £1,186

But I CAN afford a 40 years mortgage at a monthly payment of £521 (capital) + £374 (interest) =  £895

In the short term, the monthly payment is almost £300 (25%) less. That’s a big difference for a lot of people.

Now, in theory, over the long term, obviously it will cost me a lot more, if I am to pay it off over the full 40 years.

But, say if I just start with a 40 years mortgage, and run with it for 5 years. That means my equity increases by £521 x 12m x 5y = £31,260.

Also assuming that property price goes up a modest 10% over 5 years. The house will be worth just over £300K after 5 years. So that adds another £25k equity. That's give me £25k (initial deposit) + £30k (capital repayment) + £25K (house price increase) = £80k equity after 5 years

At this point, my 5 years fixed rate mortgage deal come to an end and I switch to the normal 25 years mortgage. My equity increases from 9% (25k/275k) to about 26% (£80k/£300k)

So all I have to do is to pay some meagre additional interest over 5 years at £22 x 12m x 5y = £1,320! That's nothing compared with what I gained over 5 years.

Am I missing something here? Because it looks like it makes perfect sense for everyone to get a 40 years mortgage???

 

Although as many have pointed out there are many factors involved, rent is continually going up also.

If you buy a 100k house with 25k deposit, rate 2% 25 years, fixed for 10.

£38160 in mortgage payments are made over those ten years.

However the same house costs, £650 to rent, £78000.. 

If inflation gets to the pound, then the mortgage owner will be better off than the renter even more so, as their debt is inflated away. So yea your argument generally rings true.

Considering risks, if you used HTB, this is tax payers money, its unlikely the goverment will allow house prices to crash. They are more likely to print money and use more policies to prop it up. Increase homelessness to increase desperation or create a mortgage relief policy etc.

However new builds are generally poor value for money, the price is often over inflated and it can take up t 5-10 years just to find a buyer willing to pay what you did. Although that is depe6on the area.

Interestingly, many Londoners are heading up to Birmingham and Manchester which is really driving up local prices. 

I bought 2 years ago, was fed up of paying rent, owning has its costs to like house maintenance but overall it's cheaper. As long as you don't over leverage yourself life gets so much better.

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10 hours ago, peter_2008 said:

A question.  

Say I have a deposit of £25K, and borrow £250,000 at 3% to buy a £275k house.

I CANNOT afford a 25 years mortgage at a monthly payment of £834 (capital) + £352 (interest) =  £1,186

But I CAN afford a 40 years mortgage at a monthly payment of £521 (capital) + £374 (interest) =  £895

In the short term, the monthly payment is almost £300 (25%) less. That’s a big difference for a lot of people.

Now, in theory, over the long term, obviously it will cost me a lot more, if I am to pay it off over the full 40 years.

But, say if I just start with a 40 years mortgage, and run with it for 5 years. That means my equity increases by £521 x 12m x 5y = £31,260.

Also assuming that property price goes up a modest 10% over 5 years. The house will be worth just over £300K after 5 years. So that adds another £25k equity. That's give me £25k (initial deposit) + £30k (capital repayment) + £25K (house price increase) = £80k equity after 5 years

At this point, my 5 years fixed rate mortgage deal come to an end and I switch to the normal 25 years mortgage. My equity increases from 9% (25k/275k) to about 26% (£80k/£300k)

So all I have to do is to pay some meagre additional interest over 5 years at £22 x 12m x 5y = £1,320! That's nothing compared with what I gained over 5 years.

Am I missing something here? Because it looks like it makes perfect sense for everyone to get a 40 years mortgage???

The interest is generally front loaded so that in the first 5 years you pay mostly interest and very little capital. Therefore your accrued equity would not be as high as you state. 

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13 minutes ago, winkie said:

You could say low interest rates work for different people.......one would say they can pay less and borrow more, another an opportunity to overpay and get debt free, others will always pay back as little as possible, use the extra money to live better today..... ;)

But if rates have to go up to 5% again as abruptly as they went down then you're in big trouble. The mortgage stress test was introduced because it is a real possibility.

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Please also consider Japan, they've had low interest rates for 20 years now.... who is to say the UK will ever increase above 1% again and if so what's the likelihood that will come in the next 10 years?

 

The Conservatives would loose their position, Labour would get in and mass house build. Driving down prices further although that's probably what's needed, I can't see boomers or owner millennials ever voting for them. 

If house prices crashed substantially and the goverment did nothing to prop them up well, expect a council housing listing 5 times the size as nobody would bother buying again.

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6 minutes ago, Timbuk3 said:

The interest is generally front loaded so that in the first 5 years you pay mostly interest and very little capital. Therefore your accrued equity would not be as high as you state. 

That's a good point. £250K @ 3% is £7500 in the first year, or £625 a month. I think the OP calcs are wrong.

I haven't done the calcs but the 1st year's interest will be the same regardless of the term. It will just decrease slower over 40 years.

Edited by Captain Kirk

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  • 295 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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