Mortgage overpayment - general question

DM1983

I have read in many expert advice posts that it is better to overpay on a longer term mortgage as opposed to simply taking a shorter term (making equal monthly payments in both cases) because these amount to the same thing financially. This doesn't make sense to me.

eg. Lets say I have €1000 monthly repayment on a 30 year mortgage and in year 1, ~€666 is interest and ~€333 is capital. The interest is front loaded which is fine. The issue is that if I sell after say, 5 years. As far as I'm aware, there is no recalculation to take account for the fact that I only held the debt for 5 years, not 30 years.

It would seem to me that the two options only work out to be financially equal if the mortgage is paid off in full. In the event of switching, trading up etc. during the term of the mortgage (which would be a very common occurrence) you are financially worse off if overpaying on a longer term rather than simply taking a shorter term.

I understand that there is the flexibility advantage with overpaying but I am only concerned with financial cost at the moment. Am I missing something fundamental here?

amcalester

Interest is calculated on the remaining balance, not the initial loan amount.

phormium

Interest is not front loaded so that is possibly why the concept of it being better to overpay is not making sense to you, it's higher in the beginning because the amount owing is higher but is calculated on the outstanding balance usually daily and added monthly or quarterly to accounts.

It allows more flexibility to take the longer term mortgage and overpay, the only real additional cost is you will need mortgage protection for the longer term initially but for most people that is not too expensive and you can always cancel if the mortgage finishes earlier than specified term so saving that cost at the end too.

DM1983

Yep makes perfect sense. Thanks guys.