Mortgage length

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settlement

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Hi all,

I used to always avoid housing as a place to put my money and did well out of ETFs for years. I'm now at the stage where I want to own my own place but am realising I don't know much about mortgages.

Intuitively, I know that paying off a mortgage in the shortest possible time seems like the best deal in the long run and being young and a relatively high earner with no other loans and no children etc this is tempting.

However, I'm also aware that some people say that due to inflation etc (I know that we can't really predict this) that it's a really good deal to deliberately pay the mortgage back over a very long time. It also means lower monthly repayments which has a lifestyle benefit, eg if I want to take time off.

Does anybody have any ideas about this or even just recommended reading?
 
Take the longest mortgage term you can get and then make the highest monthly payment you can comfortably manage (or make lump sum payments from bonuses or whatever).
 
Thirsty said:
Take the longest mortgage term you can get and then make the highest monthly payment you can comfortably manage (or make lump sum payments from bonuses or whatever).
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I thought most mortgages don't allow overpayment?
 
All variable rate mortgages allow overpayments.

Many fixed-rate mortgages allow overpayments, with conditions/limits.
 
Forget the contractual length of the mortgage for the moment.
Imagine that your lender offered you an indefinite interest-only mortgage. In other words, all you have to do is pay the interest and you can make capital repayments at your own discretion at any time with no penalties.
If you don't pay off the full capital by the time you die, the mortgage will be redeemed from your estate.

So at the end of this year, you have a mortgage of €300k @2% interest and you have €20k sitting in your bank account.

Option 1 - pay it off the mortgage
Option 2 - invest it in an ETF
Option 3 - invest it via your pension fund.

Option 1 will always be better than Option 2. You get a guaranteed, tax-free, risk-free, expenses-free return on your money. Look at this another way, if you had a mortgage of €280k and the lender offered to give you another €20k to buy an ETF, would you do so? The answer should be no. You should not borrow to invest in risky assets.

Whether you go for Option 1 or Option 3 depends on your personal circumstances. In summary, if the mortgage is high as a percentage of the value of the house, you should pay down the mortgage as lower Loan to Value mortgages have a lower interest rate. If the mortgage is high as a multiple of you income, you should pay down the mortgage, as you are overborrowed and more vulnerable to interest rate rises and reduced income. If on the other hand, you are in your 40s and have an inadequate pension scheme but a low mortgage relative to your salary and the value of the property, you should probably max your pension contributions.

Brendan
 
settlement said:
some people say that due to inflation etc (I know that we can't really predict this) that it's a really good deal to deliberately pay the mortgage back over a very long time. It also means lower monthly repayments which has a lifestyle benefit, eg if I want to take time off.
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If you want to take time off immediately, then lower mortgage payments make sense.
If you have definite plans to take time off in the immediate future, save up until you have the year's expenditure in the bank.

But if you might want to change your lifestyle at some unspecified time in the future, then having a low mortgage is the way to go. Pay down your mortgage aggressively. You can shift to part-time work or a lower paying job if you have lower mortgage commitments.


Brendan
 
Now, let's look at the practical issues.

Your lender will ask you to specify a term e.g. 35 years. You should choose the longest term possible. This is a bit like the indefinite term scenario. You can choose to make overpayments if and when it suits you.

If you decide today that it suits you to pay your mortgage off over 20 years and you agree to a 20 year term, then, if it suits you to "underpay" your mortgage in 5 years, you will not be allowed to do it.

So long terms give you flexibility which is very important in all aspects of financial planning.

Brendan
 
One thing to also consider, but the longer the mortgage term the higher the cost of mortgage protection life insurance. However this is probably a marginal issue/cost in the greater scheme of things, especially if you are young and healthy.
 
Good point.

However, it's important to understand that mortgage protection is a benefit.

So let's say you pay for 35 years life insurance but you clear your mortgage in 20 years. The life insurance does not automatically stop.

You can continue paying it and continue getting life cover. Or you can stop and the life cover will stop.

Brendan
 
Don't mean to drag the thread (further?) off topic, but with regard to mortgage protection life insurance it's worth understanding the difference between decreasing term, level term and convertible term cover, the relative costs of each and the implications and options that arise if the mortgage is cleared early or not serviced according to the originally agreed schedule. I'm sure that all this is dealt with elsewhere on Askaboutmoney not to mention on other sites.

E.g. the scenario that you mention, continuing cover after the mortgage is cleared early, is only possible with convertible term as far as I know.
 
Protocol said:
All variable rate mortgages allow overpayments.

Many fixed-rate mortgages allow overpayments, with conditions/limits.
Click to expand...
In which case, I should almost certainly opt for a variable rate mortgage? Because that was another Q I had
 
Brendan Burgess said:
Forget the contractual length of the mortgage for the moment.
Imagine that your lender offered you an indefinite interest-only mortgage. In other words, all you have to do is pay the interest and you can make capital repayments at your own discretion at any time with no penalties.
If you don't pay off the full capital by the time you die, the mortgage will be redeemed from your estate.

So at the end of this year, you have a mortgage of €300k @2% interest and you have €20k sitting in your bank account.

Option 1 - pay it off the mortgage
Option 2 - invest it in an ETF
Option 3 - invest it via your pension fund.

Option 1 will always be better than Option 2. You get a guaranteed, tax-free, risk-free, expenses-free return on your money. Look at this another way, if you had a mortgage of €280k and the lender offered to give you another €20k to buy an ETF, would you do so? The answer should be no. You should not borrow to invest in risky assets.

Whether you go for Option 1 or Option 3 depends on your personal circumstances. In summary, if the mortgage is high as a percentage of the value of the house, you should pay down the mortgage as lower Loan to Value mortgages have a lower interest rate. If the mortgage is high as a multiple of you income, you should pay down the mortgage, as you are overborrowed and more vulnerable to interest rate rises and reduced income. If on the other hand, you are in your 40s and have an inadequate pension scheme but a low mortgage relative to your salary and the value of the property, you should probably max your pension contributions.

Brendan
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How would you respond to the assertion that equities / ETFs have outperformed the average mortgage rate and so, even post tax, are possibly a better bet? With all the usual caveats that past performance doesn't indicate future returns. I must say I would be compelled by this but feel it less so due to the whole deemed disposal malarkey which doesn't look like it's going away anytime soon. So if you take pensions out of the equation for a moment, wouldn't option 2 be better than 1?
 
settlement said:
In which case, I should almost certainly opt for a variable rate mortgage? Because that was another Q I had
Click to expand...

At the moment, fixed rates are generally lower than variable rates. So I'd say to pick a fixed rate but confirm that the lender will allow overpayments (up to a certain limit) each year without penalty, while in the fixed rate.
 
ClubMan said:
continuing cover after the mortgage is cleared early, is only possible with convertible term as far as I know.
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That is not correct. The life cover is separate from the mortgage.

So if you take out a mortgage over 20 years and a policy which decreases over 20 years to match it, but you pay off your mortgage after one year, the policy remains in force as long as you pay your premium.

So that is my point. While you have to pay higher insurance for a longer term policy, you do get more cover, whether you pay off your mortgage faster or not.

Brendan
 
settlement said:
assertion that equities / ETFs have outperformed the average mortgage rate and so, even post tax, are possibly a better bet?
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It is a bet. It is not a better bet.

You are taking a risk that the long-term return after tax will beat the mortgage rate.

It may do. But it may not.

It is not a risk you should take at any time. But with markets at great highs during a weird economic period, you certainly should not take this risk today.

Brendan
 
settlement said:
I should almost certainly opt for a variable rate mortgage? Because that was another Q I had
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Difficult one. Normally, you would be correct.

But the Irish mortgage market is dysfunctional and fixed rates are much lower than variable rates. So you are better off fixing and paying the penalty if there is one.

Brendan
 
Brendan Burgess said:
It is a bet. It is not a better bet.

You are taking a risk that the long-term return after tax will beat the mortgage rate.

It may do. But it may not.

It is not a risk you should take at any time. But with markets at great highs during a weird economic period, you certainly should not take this risk today.

Brendan
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If I understand correctly, you are saying that the risk of ETFs doing badly, and consequently losing money, is greater than the risk of ETFs doing very well, but not having opted to invest in them? In which case I see your point
 
Hi Settlement

That is not quite it.

I would expect that over the long-term a diversified investment in equities will produce a positive return. So it is more likely that there will be a positive return than a negative return.

However, the positive return has to exceed the mortgage interest rate. And it must be the return after tax and charges. That may well still happen.

However, the risk is just not worth it.

It is one of the first principles of investing - don't borrow to invest in shares.


Brendan
 
NoRegretsCoyote said:
Not for all banks at all terms right now.

For example AIB variable of 2.95% is lower than some of its fixed rates right now.
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That’s not what was said though.

Fixed rates are lower than variable rates.

The poster should find a 1.95% rate which allows up to a 10% lump sum overpayment.

Some of these products are fantastic; 1.95% fixed on, say, a €500k mortgage and you can lob up to €50k against it and 10% per year thereafter if you’re lucky enough to be able to do so.

What more could a borrower ask for?
 
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