I am looking for a new mortgage. On moneysupermarket they suggest that you put the term of the loan required at no more than 5 years, as this is the average period before people change their mortgage. With this in mind, and with the fact that interest only/endowment mortgages are anathema to almost all at the moment, how does anyone ever pay off a repayment mortgage. Surely the first 5 years of a repayment mortgage are nearly all interest. None of the capital gets paid. So just when you start to pay off the capital, you change mortgages and start paying the interest only bit at the start. Am I missing something?
A common mis-conception about the early years of a repayment mortgage. Assuming a 5% interest rate and 25 year term, about 10% of the loan willhave been paid off in 5 years - about 16% for a 2o year term, and 25% for a 15 year term.
Usually the best option is to keep the repayment term as short as possible, and to try and have the loan paid off by retirement date (or sooner). I have suggested to my clients that paying off the mortgage as quickly as possible was possibly a better option than increasing pension contributions.
You must be misunderstanding them. What they are asking is to supply a 5 year time frame so that they can compare deals which might involve fixed deals over much of that period. The actual term will no doubt be asked for separately.
As they say, this is the average period before people *change* their mortgage, not *pay it off*.
This is not true. See Doug's reply, who is getting to be quite a dab hand at the old arithmetic.
Actually, although it's not true, it's not totally untrue either, it's just an exaggeration. The rate at which you pay off the debt is very dependent on the actual interest rate. Back when rates were 15%, you would have paid off only 3% or so of capital after 5 years of a 25 year term. Fortunately such high rates didn't last long. The lower the rate, the faster you pay off the loan, and obviously if the interest rate were 0%, you'd expect to have paid off one fifth of the capital after one fifth of the term had elapsed.
Well, if when changing every 5 years you go for a new 25 year term each time, then obviously you're onto a Bad Thing. The trick is to make the new term end at the same date as the old one would have.
Suppose you borrow £100k over 25 years at 5%. By Doug's figures, you'd pay off around £10k of this in the first 5 years. If you then transfer the loan to a new lender, keeping the term end the same, it's like taking a new 20-year loan of £90k.
You then pay off 16% *of this £90k* over the next 5 years, bringing the debt down to £76k. The next 5 years reduce this by a quarter to £57k.
The figure Doug didn't supply, for a 10-year term, is 44%. So the fourth
5-year period will reduce the £57k to about £32k. The fifth 5-year period will of course reduce the remaining debt by 100%.
BeanSmart website is not affiliated with any of the manufacturers or service providers discussed here.
All logos and trade names are the property of their respective owners.