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Issue and Background

Having gotten a new job, I am moving out of my rented accommodation, and moving across the country to what is a far more expensive area, where I am buying a 45% share in a £260,000 shared ownership apartment (Rent-only properties in the area in question are quite frankly shocking in price).

Due to a technicality which I am fine with, I am moving from a mid-level role at my current workplace to a junior role at my new workplace. Even with moving to a junior role, my salary will increase from what I am earning in my old job (due to complications at the old job). In addition, I have been told it is likely that I will be promoted back to mid-level within 6 months to 2 years once this technicality is overcome.

Unfortunately, the difference in monthly salary between my old job and my new job, is less by quite a bit than the difference between the rent at my old place and the monthly cost (rent + service charge + mortgage) of my new place, assuming I get a standard 25 year mortgage. I can manage (without becoming hand-to-mouth), but I would have to cut down on quite a bit of my monthly outgoings. My planned trip to Japan would probably go out the window too.

My mortgage advisor/broker has suggested an alternate plan of action which I was quite surprised at, as it is something I had never considered, and I cannot find mentions of anywhere on the internet.

Given I will be remortgaging once the fixed term of whatever mortgage I get now ends (to avoid going on the standard variable rate), go for a 40 year (the maximum possible lending term) mortgage for that first fixed term. Once that fixed term period (likely to be 2 years) ends, remortgage onto a much more standard 25 year (or less) mortgage.

This keeps my increase in my monthly outgoings for those first 2 years almost exactly in step with the increase in my monthly salary between the jobs (accounting for tax, etc). It also protects me in-case the worse happens and I lose my new job in the first two years, because the monthly cost is lower (I have no reason to expect this will happen, it is just extreme-worse-case planning). Then, by the time the remortgage is happening, I hopefully will have been promoted and have more money available a month (but nor am I reliant on that happening either).

* Both mortgages are with the same company and are identical except for the term.

Question

As a first time buyer, Is the advice of taking out a very long term (40 year) mortgage, with the plan to remortgage to a much lower term mortgage once the fixed rate period of the first mortgage ends (and thus can have hopefully come into more money and as such can much more easily afford it), a sensible option? Also, are there any probably caveats?

  • Really nice question - welcome to Money.SE. I don't have an answer unfortunately but I hope you get some useful info. It sounds like it might make sense as a concept but you are right to check whether there are any caveats. – Vicky Aug 6 at 10:07
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Regular remortgaging at the end of a fixed rate period is a standard feature of the UK mortgage market, so you shouldn't be too worried that you're being sold something fundamentally dodgy. If the new mortgage fits within the usual affordability/LTV criteria, there's no reason you won't be able to change to it. Though of course mortgage advisers/providers probably like the fees associated with frequent remortgaging :-)

That said, there's no absolute guarantee you'll be able to do it. The economy might look very different by then, especially given the current political uncertainty. If your equity has reduced substantially or even gone negative things will be much harder. Maybe your job won't develop as planned.

So you should be happy with being stuck with the 40 year mortgage if all else fails. You already address that in your question, so it sounds like you are, but just to be explicit about some things to think about:

  • Would that take you into retirement?
  • Will you be able to overpay (at least after the fixed rate period ends) to reduce the term if you have the spare cash to do it? As pointed out in the comments, this would for example let you repay it in 25 years if possible without tying you to the higher monthly payments.
  • How would the interest rate be determined after the fixed rate period, is that definitely affordable given a reasonable range of predictions for UK interest rates - e.g. suppose the Bank of England rate goes up to 2 or 3%?
  • Obviously, the sheer amount of interest paid over the 40 years if I don't end up remortgaging, is a concern, but just in terms of the monthly payments if I don't end up remortgaging, they are dealable with. And there is hopefully be room to overpay too if I do get stuck. My main concern was the switch from a 40 to a ~20 year term after two years. That is a big jump and I didn't know if would raise any red flags with lenders. – Scott Dennison Aug 6 at 10:39
  • @ScottDennison just to double-check, you've looked at what the payments would change to after the fixed rate ends? – GS - Apologise to Monica Aug 6 at 11:02
  • I added a note that they shouldn't care about the new term if it meets the normal criteria. At least, I've never heard of that being an issue. – GS - Apologise to Monica Aug 6 at 11:03
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    @scott If you can overpay without penalty and save accordingly on future interest, consider keeping the 40-year mortgage and paying it according to the 25-year schedule when you can. In theory, you’d pay it off in 25 years if all goes to plan; and if it doesn’t, you can fall back to just the minimum monthly payments. – Lawrence Aug 6 at 11:07
  • @GaneshSittampalam Yes. While it does goes onto to a variable rate, at the current %s (2.14% fixed, 4% variable), the variable potion of the 40 year mortgage is still less per month than fixed rate portion of the 25 year mortgage. – Scott Dennison Aug 6 at 11:14

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