Ditch my fix?

Lower rate even with a lower payment pays off more capital.

You've got to be careful to distinguish between the interest and repayment parts of your mortgage payment. The interest is money you actually pay, it goes away. But capital repayments aren't really payments as such - they're just converting cash into equity. So in terms of working out what wins in the long term, you can't just look at two mortgages and compare the monthly repayment.

That said, of course, cash flow is important too, and so you may choose to prioritise lower repayments even though you take longer to pay off your mortgage as a result - that's a matter of personal priorities and no guide can tell you what to do.

You also need to make sure you're comparing two plausible scenarios. You've got one clearly defined - switch in November to a new 5-year fix at 1.79%, paying a £1000 arrangement fee and a £3612 ERC. But what's the alternative you're comparing to? You need to compare like-for-like over the same time period. E.g. if you switched product at the end of your current fix, you'd likely pay a fee then too.

I've worked up an example that assumes you switch to a 3-year fix at 1.79% at the end of your current term, so both new fixes end at the same point and we can compare over the next 5 years. (I'm assuming you'll get a new product after that point either way, so we can ignore everything that happens after October 2022.) I've assumed that's a fee-free product as well.

With the "wait" option, you're paying £1038 a month of which between £545-580 is interest for the first couple of years, then dropping to ~£828 payments of which £220-250 is interest thereafter. Over the five years, your total outgoing cash flow is about £54,700, your total interest paid is £22,000 and you have £148,000 left to pay.

With the "ditch the fix" option, you're paying £845 a month throughout - assuming you've added both product fee and ERC to the mortgage, £225-275 of that is interest. Your total outgoing cash flow over the five years is £50,700, your total interest paid is £15,000 and you have £149,000 left to pay as a result of increasing the mortgage.

Effectively, then, ditching the fix is better for your cash flow AND saves you £7K in interest, at the cost of £1K reduced equity. Sounds like a win to me - which is no surprise, as by dropping the interest rate by over 2%, you make back the 2% ERC in the first year, and the second is pure win.

The simple test is rate difference over the time.

180k * (0.0385- 0.0179) * 2 = 7416

With repayment it will be less but £7k more than enough to cover the costs and leave some left to make real savings, unless a very short term.

getmore4less wrote: »

The base comparison is simple for two scenario.

Add the fees make the payments the same and see how much you have left in 2years.

The problem with this approach is that after 2 years, the "ditch" option still has 3 years of fix left, whereas with the alternative option, the OP is then liable for more fees immediately. It doesn't swing it in this particular case, but you'll systematically favour waiting it out if you ignore this.