Most effective ways to pay off a large mortgage?
Discussion
Firstly, apologies for the wall of text thatvwill follow. I understand before making the decision I'm about to explain I should seek professional advice, and will do so, however I wanted to gauge if anyone here has had experience of doing something similar and gauge how viable my assumptions are.
Myself and my long term partner are at the point where we would like to sell our current property and move on to the "forever home", in order to move closer to her family and have enough space to start our own. As a result we are looking at a considerable jump in the cost of property we are likely to buy.
Current situation:
House value is circa £200k. Strong comparable's to justify this in the immediately surrounding area
~£100k in equity
~£20k in accessible savings
The houses we are looking at are valued at circa £450k, meaning a minimum deposit of £45k required.
In order to keep the monthly payments at a level I feel comfortable with we would have to increase our mortgage term to around 35 years, which would take me to being 60. I'd like to try and shorten this time if possible without increasing my monthly costs.
My theory is if I only put the minimum deposit down, whilst I'll see a slight increase to my monthly cost and I'll pay more interest over the whole term, this will free up around £50k to invest long term.
I would look to either invest this in either:
Shares - I would look to pay somebody to manage this for me or use a fund. I have no prior experience doing this. I'm told I should expect on average 7% growth per year?
Property - I would buy a house in reasonable condition, place it with a management company and make minimal profit per month. My hope is that over the next 20 or so years, it would rise in value until it reached a point where I could sell up and clear the mortgage on our house.
Is the above remotely feasible or am I barking up the wrong tree? Any advice or pointers is appreciated, this is a big jump for us.
Myself and my long term partner are at the point where we would like to sell our current property and move on to the "forever home", in order to move closer to her family and have enough space to start our own. As a result we are looking at a considerable jump in the cost of property we are likely to buy.
Current situation:
House value is circa £200k. Strong comparable's to justify this in the immediately surrounding area
~£100k in equity
~£20k in accessible savings
The houses we are looking at are valued at circa £450k, meaning a minimum deposit of £45k required.
In order to keep the monthly payments at a level I feel comfortable with we would have to increase our mortgage term to around 35 years, which would take me to being 60. I'd like to try and shorten this time if possible without increasing my monthly costs.
My theory is if I only put the minimum deposit down, whilst I'll see a slight increase to my monthly cost and I'll pay more interest over the whole term, this will free up around £50k to invest long term.
I would look to either invest this in either:
Shares - I would look to pay somebody to manage this for me or use a fund. I have no prior experience doing this. I'm told I should expect on average 7% growth per year?
Property - I would buy a house in reasonable condition, place it with a management company and make minimal profit per month. My hope is that over the next 20 or so years, it would rise in value until it reached a point where I could sell up and clear the mortgage on our house.
Is the above remotely feasible or am I barking up the wrong tree? Any advice or pointers is appreciated, this is a big jump for us.
Don't forget stamp duty at £12,500 which eats into your 20k of savings.
Assuming you can get a mortgage at 1.8% your repayable interest on £405k for 35 years is £140k
Assuming your £50k investment grows at 7% a year for 35 years you'd end up with £575k, although looking at the current markets 7% may be difficult for a while.
Your total mortgage repayments including interest £545k
Your theoretical investment value £575k
However, if your mortgage rate jumps to 3% your costs are going to be £654k, leaving a hole of £79k
Assuming you can get a mortgage at 1.8% your repayable interest on £405k for 35 years is £140k
Assuming your £50k investment grows at 7% a year for 35 years you'd end up with £575k, although looking at the current markets 7% may be difficult for a while.
Your total mortgage repayments including interest £545k
Your theoretical investment value £575k
However, if your mortgage rate jumps to 3% your costs are going to be £654k, leaving a hole of £79k
Never assume mortgage rates are going to be this low forever, especially over 35 years.
They went up to 15% briefly around 1991....10% was typical back then.
Always leave yourself some "breathing space".
I don't think there is such thing as a forever home when you are young, so many things could happen to your circumstances.
Good luck
They went up to 15% briefly around 1991....10% was typical back then.
Always leave yourself some "breathing space".
I don't think there is such thing as a forever home when you are young, so many things could happen to your circumstances.
Good luck
Good thing about forums is you will get a wide variety of views and risk profiles.
For me personally you have too many assumptions and taking on more than your comfortable with but trying to justify it.
Previous poster mentioned a 1.8% interest rate. You just won’t get that now. Probably closer to 2.2-2.5% if your doing well. Keep it mind it’s very possible to have it go to 3-4% maybe more but budget for 3-4%.
Personally I’d look for something more comfortable. Any one of your wheels in that plan start to wobble and you’ll be lucky to to not have a heart attack by the time your 60.
For me personally you have too many assumptions and taking on more than your comfortable with but trying to justify it.
Previous poster mentioned a 1.8% interest rate. You just won’t get that now. Probably closer to 2.2-2.5% if your doing well. Keep it mind it’s very possible to have it go to 3-4% maybe more but budget for 3-4%.
Personally I’d look for something more comfortable. Any one of your wheels in that plan start to wobble and you’ll be lucky to to not have a heart attack by the time your 60.
I'd be looking at the income you'll need to get such a huge mortgage firstly.
Secondly, mortgage cos will want to know why you want to borrow more on the new gaff to release existing equity ... so you may need to consider selling first and then going back in as a second time first time buyer iyswim.
Thirdly, stretching yourself to 35 years term and planning a family presumably will mean pressure on income, expenditure and so maintaining this in the future whilst considering that we are presently still on historically low interest rates.
Secondly, mortgage cos will want to know why you want to borrow more on the new gaff to release existing equity ... so you may need to consider selling first and then going back in as a second time first time buyer iyswim.
Thirdly, stretching yourself to 35 years term and planning a family presumably will mean pressure on income, expenditure and so maintaining this in the future whilst considering that we are presently still on historically low interest rates.
Well done for doing so well on the property front so young
My only take on this would be to get a long fix on your mortgage as I think it is v likely that we will see a series of rises in the interest rates so if you can get a decent 5 year fix then fill your boots, as you don't want to find in 2 years that your mortgage payment shoots up making the house unaffordable
My only take on this would be to get a long fix on your mortgage as I think it is v likely that we will see a series of rises in the interest rates so if you can get a decent 5 year fix then fill your boots, as you don't want to find in 2 years that your mortgage payment shoots up making the house unaffordable
Thanks for all the helpful feedback so far.
I'd just like to clarify on a few points:
All savings are earmarked to cover stamp duty, solicitors fee's and moving costs. Its purely the accrued equity in the house I'm looking at playing around with.
We are not looking at an interest only mortgages. My understanding is that with a repayment mortgage any overpayment we make comes straight off the borrowed amount. I therefore wouldn't have to leave that money invested for the full 35 years, it would be a case of waiting for the value of investment to exceed the value of the loan and any early repayment charges. Is it as simple as this?
Thanks for the recommendation of advisors, certainly something to consider nearer the time.
Regarding affordability, it's a very valid point and something I'm struggling to judge currently.
I'm in the fortunate position where my salary has grown considerably since we first bought the house we live at now. As such, I enjoy a large buffer between what I take home and what I spend each month. Buying this house will clearly have some impact on that and its hard to judge at what point you draw the line.
From the affordability checkers I have done online (the ones provided by Nationwide, Lloyds etc) I can theoretically borrow in the region of £500k, meaning a maximum house price nearer £600k. The monthly repayments on this would never be at a level I feel comfortable with however.
I'd just like to clarify on a few points:
All savings are earmarked to cover stamp duty, solicitors fee's and moving costs. Its purely the accrued equity in the house I'm looking at playing around with.
We are not looking at an interest only mortgages. My understanding is that with a repayment mortgage any overpayment we make comes straight off the borrowed amount. I therefore wouldn't have to leave that money invested for the full 35 years, it would be a case of waiting for the value of investment to exceed the value of the loan and any early repayment charges. Is it as simple as this?
Thanks for the recommendation of advisors, certainly something to consider nearer the time.
Regarding affordability, it's a very valid point and something I'm struggling to judge currently.
I'm in the fortunate position where my salary has grown considerably since we first bought the house we live at now. As such, I enjoy a large buffer between what I take home and what I spend each month. Buying this house will clearly have some impact on that and its hard to judge at what point you draw the line.
From the affordability checkers I have done online (the ones provided by Nationwide, Lloyds etc) I can theoretically borrow in the region of £500k, meaning a maximum house price nearer £600k. The monthly repayments on this would never be at a level I feel comfortable with however.
For proper mortgage advice speak to Sarnie I rate him very highly as I am complete mortgage idiot and he takes the time to explain stuff to me like I am 5 years old.
https://www.pistonheads.com/gassing/topic.asp?h=0&...
https://www.pistonheads.com/gassing/topic.asp?h=0&...
There is never a right or wrong answer in these situations, but having moved up the ladder a few times I'll give my 2p's worth.
Firstly I've always made sure I have the same amount of savings before and after given you never know what might need doing in the new house once you're in (plus it's always been the emergency fund).
I'd then work on the basis that fees and stamp duty come out of the equity with the balance the deposit on the mortgage. I've then taken the mortgage over the maximum number of years but made sure I'd knew what the monthly cost would be at a term, say, five or ten years less with that being my target monthly payment. It then comes down to a decision of whether I pay just the required monthly payment or top up to an overpayment amount, or whether I save the difference either in cash or my S&S ISA. This also gives you some breathing space if you do have little ones and drop a salary coming into the house or have to cover childcare costs (we had a situation after our second child where our monthly childcare bill was the same as our mortgage).
Another thumbs up for Sarnie here.
Firstly I've always made sure I have the same amount of savings before and after given you never know what might need doing in the new house once you're in (plus it's always been the emergency fund).
I'd then work on the basis that fees and stamp duty come out of the equity with the balance the deposit on the mortgage. I've then taken the mortgage over the maximum number of years but made sure I'd knew what the monthly cost would be at a term, say, five or ten years less with that being my target monthly payment. It then comes down to a decision of whether I pay just the required monthly payment or top up to an overpayment amount, or whether I save the difference either in cash or my S&S ISA. This also gives you some breathing space if you do have little ones and drop a salary coming into the house or have to cover childcare costs (we had a situation after our second child where our monthly childcare bill was the same as our mortgage).
Another thumbs up for Sarnie here.
Dsdans said:
My theory is if I only put the minimum deposit down, whilst I'll see a slight increase to my monthly cost and I'll pay more interest over the whole term, this will free up around £50k to invest long term.
I would look to either invest this in either:
Shares - I would look to pay somebody to manage this for me or use a fund. I have no prior experience doing this. I'm told I should expect on average 7% growth per year?
Property - I would buy a house in reasonable condition, place it with a management company and make minimal profit per month. My hope is that over the next 20 or so years, it would rise in value until it reached a point where I could sell up and clear the mortgage on our house.
Is the above remotely feasible or am I barking up the wrong tree? Any advice or pointers is appreciated, this is a big jump for us.
£50k into shares in the current market would be a bold move give the significance of the sum. I would look to either invest this in either:
Shares - I would look to pay somebody to manage this for me or use a fund. I have no prior experience doing this. I'm told I should expect on average 7% growth per year?
Property - I would buy a house in reasonable condition, place it with a management company and make minimal profit per month. My hope is that over the next 20 or so years, it would rise in value until it reached a point where I could sell up and clear the mortgage on our house.
Is the above remotely feasible or am I barking up the wrong tree? Any advice or pointers is appreciated, this is a big jump for us.
You’re young, no family just yet, can you improve your career prospects/earning potential to put you in a position where you can pay it back earlier?
LooneyTunes said:
£50k into shares in the current market would be a bold move give the significance of the sum.
You’re young, no family just yet, can you improve your career prospects/earning potential to put you in a position where you can pay it back earlier?
Would it matter so much if I were just forgetting about it for 20 years? I understand in the short term there's a good chance it could drop but over a long period of time this should just be a blip? You’re young, no family just yet, can you improve your career prospects/earning potential to put you in a position where you can pay it back earlier?
Of course, I'm very driven with my career and expect to keep pushing the salary forward as I develop. I have however had a good increase recently putting me at the top end of my bracket, and I don't expect anything significant (outside of the standard 2/3% pa increase we typically see) for the next few years. The next large bump up in salary from progressing in career is likely to be countered by my partner's drop in salary when kids come along.
Regarding mortgage rates, when trying to calculate affordability I've used a rate of 2.8%. I'd like to keep mortgage payments as far below £1500 as I feasibly can, hence the long term. Our take-home is just above £5k per month.
Bear in mind that even with a 35 year mortgage, you are not really 'locking' yourself in for that long. In practice, the lock-in is for your fixed rate, and after that you can re-evaluate and do something different if circumstances dictate (for an 'arrangement fee'). However, let's say you fix for 5 years; at the end of the 5 years you may find that your investments have tanked, and interest rates are going through the roof, and the value of your property as sunk so your LTV hasn't improve much, if at all - then what are you going to do? My suggestion would be to clear down the mortgage by overpaying for free using the stockpiled cash that you've saved by taking a 35yr term rather than a 25yr term. If you are able to borrow 500k you are presumably a higher rate taxpayer, so unless you have a partner not earning, you are going to struggle (post-tax) to beat the return that you would have got by reducing your mortgage in the first place. (Or you could just plan on the basis that you overpay to the extent allowable unless interest rates shoot up and you can earn risk-free return > mortgage rate). I would focus on the 'where might things be in 5yrs time' question and see what your risk appetite looks like for that (bearing in mind risks unrelated to money!).
Nationwide's 5yr/10yr fix fix for 75% LTV is now over 3%. Their 5-yr fixed rate bond (zero risk, but interest is taxable) is 2.1%.
Check what the impact on your rate would be for different LTVs you can get by using more of your equity as deposit: increasing your deposit by X will reduce your interest payments not only because your mortgage balance itself will be lower, but also the interest charged on your original deposit will be lower as well.
Nationwide's 5yr/10yr fix fix for 75% LTV is now over 3%. Their 5-yr fixed rate bond (zero risk, but interest is taxable) is 2.1%.
Check what the impact on your rate would be for different LTVs you can get by using more of your equity as deposit: increasing your deposit by X will reduce your interest payments not only because your mortgage balance itself will be lower, but also the interest charged on your original deposit will be lower as well.
onetwothreefour said:
Check what the impact on your rate would be for different LTVs you can get by using more of your equity as deposit: increasing your deposit by X will reduce your interest payments not only because your mortgage balance itself will be lower, but also the interest charged on your original deposit will be lower as well.
This is where I’m minded to go, on the figures you gave, roughly the Mortgage would either be 90% or 80% depending on if you put the £50k in or not.For me, I’d go fit £400k borrowings & 80% LTV. The lower rate on all the £400k when worked out on the £50extra deposit is likely to be as good a return as you’d get & tax free)
Affordability becomes easier too as repayments are likely to be a£200-£300/mth less (which If Id figured out I could already afford the higher rate, I’d drip into a savings account. Possibly using some to over pay so I dropped another LTV band ahead of next remortgage date. Play about with online calculators.
Dsdans said:
LooneyTunes said:
£50k into shares in the current market would be a bold move give the significance of the sum.
You’re young, no family just yet, can you improve your career prospects/earning potential to put you in a position where you can pay it back earlier?
Would it matter so much if I were just forgetting about it for 20 years? I understand in the short term there's a good chance it could drop but over a long period of time this should just be a blip? You’re young, no family just yet, can you improve your career prospects/earning potential to put you in a position where you can pay it back earlier?
Of course, I'm very driven with my career and expect to keep pushing the salary forward as I develop. I have however had a good increase recently putting me at the top end of my bracket, and I don't expect anything significant (outside of the standard 2/3% pa increase we typically see) for the next few years. The next large bump up in salary from progressing in career is likely to be countered by my partner's drop in salary when kids come along.
If you can position yourself (even if it means figuring out what you need to do and/or funding development yourself instead of waiting for your employer to do it) to lock in earlier promotions then that can set you up really nicely well into the future but it’s often hard to make those sorts of moves as you get older and have more responsibilities in life.
People are wired differently, so there’s no right or wrong answer for much of this. Just providing a different perspective.
Dsdans said:
Would it matter so much if I were just forgetting about it for 20 years? I understand in the short term there's a good chance it could drop but over a long period of time this should just be a blip?
Are you aiming to use the £50K investment to help clear the mortgage in 20 years time? If so, as others have said getting the best mortgage deal you can right now with the largest deposit is by far the easiest and worry free method. As others have said rates are going up now, when I got my first mortgage 5-6% was the average APR, versus sub 2% for the best the last decade, they don't look like big numbers but put them into a mortgage calculator and you will see just how much difference even 1% makes to a large mortgage cost over 20 years.
The 'easiest' way to pay the mortgage off though is by increasing your income, and than overpaying - most fixed deals allow 10% overpayment per year, do this every year and you will make a big dent in the debt total quite quickly.
What ever you decide just get on with it interms of securing a mortgage agreement, the US is talking about a 0.75% rise in rates, it pretty clear the days of sub inflation mortgages are coming to an end very quickly now. The longer you delay in signing up a longterm deal fixed deal, the more its going to cost you.
onetwothreefour said:
Nationwide's 5yr/10yr fix fix for 75% LTV is now over 3%.
Am pretty sure just 12 months ago it was sub 2%!!.....wasn't there also talk not that long ago about negative rates? Feels like different time now. ......Just checked, the 2.25% rate we got on our remortgage end of last year is long gone, same product with Barcalys is now 3.7%, and 4% is been quoted for some products. I think we all knew rates would go up, but its happening quite quickly now. If the BOE raises rates again over the next few months the historical rates of 5-6% products cannot be far away.
£400K loan on a 2.25% product over 25 years = £1,175, at 6% = £2,577!!! An extra £1,400/month of pure interest/cost for no additional equity.
I'm glad I fixed for 10 years on a 15 year term, I hope the OP gets a move on with their mortgage application!
Edited by gangzoom on Thursday 16th June 22:29
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