Mortgage illustrations can be very confusing. There is an ever-growing amount of information which the FCA require to be shown on these documents.
One peice of information is about how much money you will repay in total if you keep the mortgage for the term. For a 95% loan-to-value mortgage of £100,000 over 35 years, the figure it says you would repay in total would usually be around or over £200,000.
Thinking you are paying back double the amount you borrow could be enough to put some people off ever buying a house. The figures look scary when you first see them, but in my opinion it isn’t really that relevant due to a number of factors.
Firstly, the effect of inflation is ignored. The £100,000 of interest seems a lot of money in today’s terms, but if you fast-forward 35 years, £100,000 probably won’t be anywhere near as significant as it is now due to inflation. It could quite easily be a quarter as valuable as it is today.
Secondly, the figure assumes interest rates remain the same for the next 35 years, and you keep the same mortgage for the whole term. Interest rates won’t stay the same, and very, very few people will take out a mortgage for 35 years and not change mortgage lender, move house or adjust the term of the mortgage.
Lastly, and my biggest bugbear, is that the main driver of the figures, isn’t the interest rate for the initial period, for example the 2 year fixed rate at 3.5%. The main driver for the calculation of the figure is the 33 years after that which it assumes you will stay on the lenders standard variable rate, which is usually higher. A prudent borrower would look to secure a new mortgage deal after their tied-in period has ended and so the standard variable rate after this wouldn’t come into the real life calculations. If somebody was to compare all the mortgages available to them purely on the basis of how much you repay over the whole term, they would make the wrong choice almost all of the time.
Giving people enough information to make an informed decision is definitely a good thing, but sometimes it can be too much bad information given with it, which makes it difficult to know what is important. You should always speak to your adviser so that they can help you decide which information is more important and which isn’t.
Jason Hinde FPFS, Cert SMP – Chartered Financial Planner
19th June 2017