Mortgages for people with savings
December 8, 2010 4:02 PM   Subscribe

Are there special things I should consider when shopping around for a small mortgage to be paid off quickly?

The man-lollusc and I are thinking about buying a place next year. This will be our first house, but we have a lot of savings. We have started shopping around for mortgages. It's pretty clear what the best deals are for anyone looking for a large 30-year mortgage. But I'm finding it hard to see whether we need to take different factors into consideration in our situation.

We will probably only need a mortgage of around $100,000-$150,000, which in our city (Canberra) is about a quarter to a third of the cost of the two-bedroom apartment/townhouse we are looking for. (Yes, house prices here are insane). Given our double-income-no-kids status, we will probably pay it off within five years.

So is the same deal that is great for a 30-year $500,000 mortgage likely to be right for us? The only factors I have figured out so far that are different are that we won't need to pay for lender's insurance, and that we probably want something without a penalty for paying off early or making extra payments (although if the penalty is low enough maybe it's still worth it if the interest rate or other fees are better than other deals?)

Are there other things we should be thinking about?
posted by lollusc to Work & Money (5 answers total)
You can get great rates on a "balloon" mortgage, which instead of 30 year fixed rate is a 5 to 7 year fixed rate followed by requirement to refinance.

If I were able to pay off a mortgage in 5 years I'd go this route; saving the additional principle payments you're considering in a high yield savings account and then supplying cash in full in 2015.
posted by oblio_one at 4:27 PM on December 8, 2010

Response by poster: I hadn't heard of balloon mortgages - I'll definitely look into them. I don't really understand how it would ever be cheaper to save possible payments and pay them later, though. Given that the best mortgage rates are around 6.88%, and the best savings rates are around 6.1%, I'd always be losing money by saving instead of paying into the mortgage.
posted by lollusc at 4:36 PM on December 8, 2010

Response by poster: (And the difference between savings and loans interest rates is much higher than it seems since the interest on savings is taxed, so really it's more like a 4% savings interest rate).
posted by lollusc at 4:37 PM on December 8, 2010

I believe you can prepay a balloon mortgage as well. The point is that short-term mortgages tend to be cheaper interest-wise (because who knows where the interest rate will be in 20 years, or if you'll continue paying in 20 years, etc) and balloon mortgages are a way to get a shorter-than-usual mortgage.
posted by bsdfish at 5:36 PM on December 8, 2010

I am not sure about this, but I spoke to a mortgage broker the other week and I think he said that fixed-rate loans have penalties for early repayment, but variable rate loans don't. Although the NAB (and ANZ) have scrapped those fees anyway. But you might want to look into that.

You might want to consider seeing a mortgage broker. That was my dad's advice (who was a loans officer at one of the big four for 25 years). The dude I talked to was from Aussie Home Loans and he was actually pretty helpful, despite the cheesy ads.

I am in a similar situation and was assuming that the best route would be to get a 30 year loan and just pay it off really early. That way your required repayments are lower but you will built up a bunch that you can redraw - might be handy in case things change. Maybe that is not necessarily logical. I will be interested to see what other people have to say.
posted by Emilyisnow at 4:53 AM on December 9, 2010

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