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I spent 9 hours yesterday helping one of the three girls I’m buying a wedding dress for move into her very first house. It’s amazing how much stuff needs sorting during a move.
After the contract was signed and the keys were handed over, we drove to the house with our first load of stuff in a fleet of three cars. They were surprised that a letter had already reached the property from the mortgage lender—just a letter detailing the date and amount of the first payment.
I learned that the new homeowner’s mortgage term was 35 years. I hadn’t even realized a loan could be so long. Apparently it’s a recent development to make payments more affordable given the current high valuations in the housing market.
It seems like a double-edged sword to my mind. While it helps people afford homeownership without as much financial stretch, the longer term will inevitably mean incurring greater interest charges over the life of the mortgage.
When I got home that evening, I did a rough calculation. Their loan amount is $275,000 at 4.5% over 35 years. When I was in the market for my first mortgage, the standard term was 25 years. For the privilege of having an extra ten years on the term, they’ll pay a ballpark $85,000 in extra interest for a $230 monthly cost saving. It’s a steep total price for affordability.
When she first started working, I hassled the poor girl for nearly a year until she buckled down and started contributing to her employer’s retirement account to get the company match. Unfortunately for her, after she gets settled into the new home and comfortable with the mortgage payment, little does she know I’m going to start hassling her to consider overpayment of the mortgage principal.
It’s a thankless job, but somebody has to look out for our kids’ financial futures. I’ve even started working on a little chart detailing the cost savings over time. She likes bright colors—I might use them in my presentation.
I’ve been pondering this issue for awhile as in the US there is consideration of a 50 year mortgage span. I’ve either refinanced or paid off early every mortgage I ever had…but this discussion only impacts people who are seriously planning to live more than 25 years in that specific house…something that doesn’t seem to happen in modern times. So the trade off is lower payments now for the possibility of paying more interest 25 to 35 years from now. Actually seems reasonable in that light.
That’s a fair point. Most people don’t stay in the same house for a full mortgage term. I guess you could view a 35-year mortgage as a strategic tool, a way to get onto the housing ladder at the lowest possible monthly cost. Then, as your career and salary grow, you move up a rung or two and shorten the loan term. But it never hurts to overpay when you can.
It is one of my greatest joys … When my 35 y o son goes out of his way to thank me for schooling him on the time value of $
Out of curiosity, what age did he realise you had given him good advice?
Probably mid 20’s when he bought his house and settled down. He has already promised to “pay it forward” with my granddaughters
I think my grandson has inherited my frugality gene. He loves this particular trendy brand and is always delighted to receive it as a gift when someone else is footing the bill. But when it came time to spend his own Christmas money, he decided a budget retailer’s knockoff line—same style, 20% of the price—was suddenly good enough lol
4.5% on 35 years. You won’t find that percentage over here.
That’s just a result of different mortgage systems. In the US, banks charge higher rates because they’re locked into 30-year fixed terms—they carry all the interest rate risk for decades. In the UK, banks can charge less because they offload most of that risk to homeowners through shorter 2- and 5-year fixed terms.
so that’s actually a variable rate?
Over this side of the pond, mortgages are “fixed” for 2 or 5 years, and then you’re out of contract. At that point, you either sign up to your lender’s current deals or shop around the market for your next fix. You can also just take a variable rate tracker that mirrors the current base rate with a rider on top—normally somewhere between 0.5% and 1% above base, depending on what deals are available in the market at the time.
I agree with Jack. She’ll be upset at first, but will thank you later.
Baby steps will pay off. Good job, Dad.