25 year vs 35 year mortgage. Which to choose if I'll pay off in 10 years?

mrcheez

Hi all,

Long time reader, first time poster :cool:

I have the option of taking out either a 25 year or 35 year mortgage on a 200K loan.

I initially thought 25 years would suit me more as the final amount I pay would be far less than doing it over 35 years (I don't mind paying the slightly higher amount each month), but it never occurred to me to consider what happens if I sell the house in 10 years time.

I'm not 100% on the sums involved so it would be great if someone could let me know the results of the following calculations...

Loan amount: 200K
Interest rate: Assume constant 4.3% (just for sake of this calculation)

- What is the total amount I pay (including interest) for this loan if it is on a 25 year term, and I pay the remainder off after 10 years?

- What is the total amount I pay (including interest) for this loan if it is on a 35 year term, and I pay the remainder off after 10 years?



Many thanks!

pjmn

Not a huge amount in the difference actually...

Using your assumptions above...

Clearing a 35 year loan after 10 years would cost in total c. E279,923 whereas to clear a 25 year loan after 10 years would incur a total cost of E274,965.

{the 'totals' above include monthly payments by 120 and adding the residual balance at the end of 10 years}.

Hope that helps....

PhoenixParker

What are the terms if you overpay the mortgage in both cases?

i.e. is it applied to the principal or the interest, does it go into the account straight away, is there a fee/penalty for overpaying?

Stheno

PhoenixParker wrote: »

What are the terms if you overpay the mortgage in both cases?

i.e. is it applied to the principal or the interest, does it go into the account straight away, is there a fee/penalty for overpaying?

If you are on a fixed rate you will be penalised, variable rates usually are not.

mrcheez

Thanks for the replies. I am on a variable rate with BOI, so afaik there are no penalties if I pay it off earlier (I'll check this with them though)

I will also qualify for First Time Buyer Interest Relief on the interest in the first few years, so higher monthly interest on repayments will initially be "reduced" (I'm getting the mortgage just in time before the relief is removed at the end if the year)

Pjmn's response has me thinking now that maybe i should opt for the 35 year and save the extra 100 euro (or so) per month which could be put into bills/savings account instead.

E.g. €100 saved/month x 120 months = 12,000 saved (even before it's put into savings)

Vs extra 5,000 I have to pay at end of 10 years for selecting 35 year over 25 year

Total saving (est): 12,000 - 5,000 = 7,000

Is this right?

pjmn

No - I think you are double counting there....

My calculations are based on a) the lower monthly repayment of c. E167 per month, and the higher balance (residue) that you will have to pay if you opt for the 35 year repayment schedule .... overall that difference would be c. E5k assuming rate stayed constant @ 4.3%.

What my calculations don't factor in are...

a) any TRS you'll be entitled to during the period...

b) Any potential changes in tax legislation on the TRS front...

c) The time value of money...

mrcheez

I'll pass on these questions to the BOI advisor and see what she suggests also.. Danke

mrcheez

Finally got around to playing with some figures and it seems that 25 year is the "best" option to select to achieve minimum overall cost if clearing a mortgage after 10 years. If you select 35 year, despite saving around 170 euro/month, there is a larger final payment in year 10 which cancels out any savings (and adds additional cost of €5K as mentioned by pjmn earlier)

The following calculator was handy in coming up the final answer and illustrates the payment schedule:
http://www.timevalue.com/products/tcalc-financial-calculators/balloon-mortgage-payment-calculator.aspx

Hopefully this info might be of use to someone else.

Dubh Geannain

Very useful tool:

http://www.drcalculator.com/mortgage/ie/

You get a nice idea of what the principal Vs interest payments are

mrcheez

Saw that calculator before, but afaik it wasn't relevant to this question as it doesn't show the affect of paying off the remainder after 10 years.

Turned out what I was looking for is called a "Balloon Mortgage Payment Calculator"

Dubh Geannain

mrcheez wrote: »

Saw that calculator before, but afaik it wasn't relevant to this question as it doesn't show the affect of paying off the remainder after 10 years.

Turned out what I was looking for is called a "Balloon Mortgage Payment Calculator"

You can add up to 6 extra payments and specify which month number you want to add them at. So you should be able to simply add the a once off payment.

But again it's probably not exactly what you needed. Just thought I'd throw it up there for anyone else that might be looking at tossing a few figures about.

okiss

If you are planning to do this I would ask the bank how often do they work out the interest due on the amount principal.
When you are overpaying the mortgage insists that the over payment has to be applied to the principal of the mortgage. Some times an over payment is just left on the account to meet the next payment.
It may be better for you to set up a regular savings account to put as much as possible into it each month and make a lump sum payment off the principal of the mortgage every 12 months.
Also I would still put/keep money in your saving account just for any unexpected expenses as you won't be able to get out mortgage over payments.

MMAGirl

You could pay the difference between the monthly payments on the 25 and 35 year every month even if you took the 35 year. So there would be no difference after 10 years.

But what if you didnt sell.
What if things went wrong in your life for whatever reason.
Then the 35 year would give you greater leeway and comfort.

If nothing goes wrong then you just pay it off in 10 years anyway.

mrcheez

MMAGirl wrote: »

But what if you didnt sell.

Then 25 year would still be better as, say I didn't sell it until 15 years later, the additional cost penalty for selecting 35 year would be even greater than the 10 year period

MMAGirl wrote: »

What if things went wrong in your life for whatever reason.
Then the 35 year would give you greater leeway and comfort.

If nothing goes wrong then you just pay it off in 10 years anyway.

I won't go into specifics but I took that into account in my calculations alright and 25 year still came out better for me