For Everyone Thinking Of Redeeming A Fixed Rate Mortgage

I guess by the time the trackers are available people will have had chance to think about the reasons they went for fixed. It might just be a knee jerk reaction.

Totally agree, there are reasons that people take out a fixed rate and those reasons haven't gone away, any sensible person on a tracker is now going to overpay like mad, I for one am treating it as an unexpected short term gift that gives me the opportunity to reduce my mortgage for harder times.

I was referred to this thread because I asked about redeeming my FR, but I just wanted another FR at a better rate because I'm tied in to 6.05% for five years

We have a lifetime tracker and have had it for years and years. As the poster SammyJammy says above we have in fact put our payments up to overpay as much as possible and using the temporary gain as extra bonus. I am fully aware we are exposed (after all what if the BOE rate had gone up by 1.5% not down?) and am tryng to protect ourselves for an uncertain future.

Having said all that, I thought it was worth doing some calculations so Ive just thrown a few figures into my spreadsheet to give an illustration of how things might work out (or not).

Taking a 25 year repayment mortgage of £100k at 6% for 5 years with an ERC of 3% and a completion/exit admin fee of £150. The monthly payments for this would be £645 so total payments over the 5 years would be £38700, and at the end of 5 years you'd have £89,900 left to pay off.

If you decided to jump ship after one month to a new fixed rate at say 4.8% with a fee of £1000, the cost to change would in fact be £1000 + (£100,000 x 3%) + £150, i.e £4150. Assuming most wouldnt have the money to pay this off in one lump sum so is added to the loan, your new mortgage would actually be for around £104,000.

New payments on this mortgage would be just under £600 a month, so you'd pay £36,000 over the 5 years and have £92,000 left on the loan at the end of 5 years.

As you can see, by changing you'd have paid £2700 less in monthly payments but will end up with £2,000 more left on the loan at the end of the period, so you would actually be slightly better off by £700. Also if you could overpay at £645 a month so your monthly outgoing was the same, you'd actually end up with only £88600 left after 5 years, so a bit better again, gaining £1400.

Given this, it does show that there may be times when changing to a lower fix would be worthwhile, but at the moment deals that would make it worthwhile such as the one I used above are non existent. It also shows that those thinking of switching to a tracker would need their mortgage to average under 5% over 5 years to be competitive with an existing fixed deal at about 6% after exit fees, but given the average tracker now is likely to be BoE +2% or above, the likelyhood of the BoE staying at its current level or below for that time is very small.

If people want to do their own calculations using my spreadsheet though (in sig below), just put your existing loan into the spreadsheet loan 1, then put the new mortgage into loan 2 but add the ERC of your current mortgage in as a fee on the new loan. You should then be able to compare them fairly accurately and find out if you'll be better off or not, but for trackers I'll say again, don't assume that current rates will be the same for the next few years as they are now, as that will skew the comparison in favour of the tracker, but its unlikely to happen like that.