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  • FIRST POST
    • uF0n
    • By uF0n 11th Jun 17, 3:09 PM
    • 4Posts
    • 1Thanks
    uF0n
    Mortgage cost over 2 years vs capital remaining (amortization)?
    • #1
    • 11th Jun 17, 3:09 PM
    Mortgage cost over 2 years vs capital remaining (amortization)? 11th Jun 17 at 3:09 PM
    I'm considering two mortgage options, both 2 year fixed, and can't determine the best deal... it should be an easy determination, but I've been looking at amortization calculations and this has created confusion.

    Loan amount = £ 280 000
    Term = 21 years

    Option 1
    Rate = 1.59%
    Fee = 0
    Monthly payment = £1307
    Cost over 2 years = (1307 *24) + 0 = 31 368

    Option 2
    Rate = 1.14%
    Fee = 1450
    Monthly payment = £1250
    Cost over 2 years = (1250 *24) + 1450 = 31 450

    Result is that Option 2 costs £82 more over 2 years (maybe not a huge amount in the scheme of a mortgage, but it all counts!).

    HOWEVER, then I looked at amortization calculations...
    moneysavingexpert.com/mortgages/mortgage-overpayment-calculator
    locostfireblade.co.uk/spreadsheet/Index.html
    en-gb.calculatestuff.com/financial/loan-amortization-calculator

    After 2 years, the capital remaining is:
    Option 1 = £257,174
    Option 2 = £256,125

    With Option 2 the capital is £1049 less at the end of 2 years.

    Even though Option 2 costs me £82 more over 2 years, it results in capital being £1049 lower... is this correct, and is option 2 the better option?

    Can amortization calculators be used like this to determine the best 2 year deals, or are they only useful when looking over the full term of the loan? I asked the bank about this, and they told me that both rates should result in the same remaining capital at the end of 2 years, and only the amount if interest paid is different if comparing the 2 rates, indicating that rate of capital reduction is independent of interest rate, hence the full amount is paid off at the end of 21 years whatever the interest rate.

    I would really appreciate some advice from someone who understands this!!!
Page 1
    • dimbo61
    • By dimbo61 11th Jun 17, 3:38 PM
    • 9,394 Posts
    • 5,093 Thanks
    dimbo61
    • #2
    • 11th Jun 17, 3:38 PM
    • #2
    • 11th Jun 17, 3:38 PM
    Hi, I use "whatsthecost " website.
    On my mobile right now so can't check your figures.
    Once you have put the figures into the Mortgage calculator you can see what you owe after 24 months.
    • uF0n
    • By uF0n 11th Jun 17, 3:55 PM
    • 4 Posts
    • 1 Thanks
    uF0n
    • #3
    • 11th Jun 17, 3:55 PM
    • #3
    • 11th Jun 17, 3:55 PM
    @dimbo61, thanks but whatsthecost calculator for mortgages is close to useless... it only takes one interest rate and applies it to the full term, so not much use when considering 2 year fixed terms while also considering arrangement fees.

    As I said in the original post, most of the common calculators just tell the cost of monthly payments plus fee over 2 years... should I also consider the remaining capital debt at the end of 2 years when determining the best deal?
    • ThePants999
    • By ThePants999 11th Jun 17, 3:58 PM
    • 710 Posts
    • 791 Thanks
    ThePants999
    • #4
    • 11th Jun 17, 3:58 PM
    • #4
    • 11th Jun 17, 3:58 PM
    Let's look at it super simplistically. On a £280,000 balance, an interest rate 0.45% lower is saving you £1,260 a year in interest (wrong, cos of capital repayment, but not far off). So it's no surprise that it's better over 2 years despite costing £1450 in fees!
    • Thrugelmir
    • By Thrugelmir 11th Jun 17, 4:05 PM
    • 54,334 Posts
    • 47,150 Thanks
    Thrugelmir
    • #5
    • 11th Jun 17, 4:05 PM
    • #5
    • 11th Jun 17, 4:05 PM

    Result is that Option 2 costs £82 more over 2 years (maybe not a huge amount in the scheme of a mortgage, but it all counts!).
    Originally posted by uF0n
    Cash outflow is not a cost. Interest is a cost. Reduction in the capital balance simply means you owe less.

    So your cash outgoing has been higher. However you owe over a £1,000 less.

    At the end of 2 years with option you have a lower starting figure. Therefore will incur less interest. The longer you are are in debt the higher the possibility that interest rates will rise.
    “ “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.” Sir John Marks Templeton
    • RADDERS
    • By RADDERS 11th Jun 17, 4:07 PM
    • 135 Posts
    • 121 Thanks
    RADDERS
    • #6
    • 11th Jun 17, 4:07 PM
    • #6
    • 11th Jun 17, 4:07 PM
    Have you allowed for the £1450 fees in no 2, are you adding it to the balance ?
    • getmore4less
    • By getmore4less 11th Jun 17, 4:58 PM
    • 29,141 Posts
    • 17,428 Thanks
    getmore4less
    • #7
    • 11th Jun 17, 4:58 PM
    • #7
    • 11th Jun 17, 4:58 PM
    I'm considering two mortgage options, both 2 year fixed, and can't determine the best deal... it should be an easy determination, but I've been looking at amortization calculations and this has created confusion.

    Loan amount = £ 280 000
    Term = 21 years

    Option 1
    Rate = 1.59%
    Fee = 0
    Monthly payment = £1307
    Cost over 2 years = (1307 *24) + 0 = 31 368

    Option 2
    Rate = 1.14%
    Fee = 1450
    Monthly payment = £1250
    Cost over 2 years = (1250 *24) + 1450 = 31 450

    Result is that Option 2 costs £82 more over 2 years (maybe not a huge amount in the scheme of a mortgage, but it all counts!).

    HOWEVER, then I looked at amortization calculations...
    moneysavingexpert.com/mortgages/mortgage-overpayment-calculator
    locostfireblade.co.uk/spreadsheet/Index.html
    en-gb.calculatestuff.com/financial/loan-amortization-calculator

    After 2 years, the capital remaining is:
    Option 1 = £257,174
    Option 2 = £256,125

    With Option 2 the capital is £1049 less at the end of 2 years.

    Even though Option 2 costs me £82 more over 2 years, it results in capital being £1049 lower... is this correct, and is option 2 the better option?

    Can amortization calculators be used like this to determine the best 2 year deals, or are they only useful when looking over the full term of the loan? I asked the bank about this, and they told me that both rates should result in the same remaining capital at the end of 2 years, and only the amount if interest paid is different if comparing the 2 rates, indicating that rate of capital reduction is independent of interest rate, hence the full amount is paid off at the end of 21 years whatever the interest rate.

    I would really appreciate some advice from someone who understands this!!!
    Originally posted by uF0n
    WELL DONE...
    you got closer first time than most including some brokers that post here.

    That is close enough for most cases.

    many people get that last bit wrong and miss out the amount owing.

    The simple way to compare 2 rates with different fees is...
    add the fees(looks like you forgot that bit on option 2)
    make the payments the same (A simple adjustment to account for the interest on the difference in payments)

    see how much is owing at some point in the future(end of the fix is good)

    http://www.whatsthecost.com/mortgage.aspx
    (I see you rounded down to £1307 and up to £1250 on the base payment on £280k)


    after 2 years

    £280,000 @ 1.59% £1307pm £257,190
    £281,450 @ 1.14% £1307pm £256,224

    £966 better off.

    (Close enough but your actual lenders calcs will be different because they don't use standard 12m amortization which is an approximation, they will probably use daily interest and real payment dates which vary because of weekends.
    This will be in the region of £0-£30)

    You can adjust if you think you can get a better interest rate on the difference in the real contractual payment.
    (if you can consider longer term an lower payments)

    The key is that for any amortization the lower the rate the more capital you pay off each month on the lower rate as well as paying less interest.

    the capital * difference in rate over 2 years gets an approx answer for interest only
    That is the best you can do, a repayment mortgage will always be lower saving.
    Last edited by getmore4less; 11-06-2017 at 6:01 PM.
    • getmore4less
    • By getmore4less 11th Jun 17, 5:06 PM
    • 29,141 Posts
    • 17,428 Thanks
    getmore4less
    • #8
    • 11th Jun 17, 5:06 PM
    • #8
    • 11th Jun 17, 5:06 PM
    Let's look at it super simplistically. On a £280,000 balance, an interest rate 0.45% lower is saving you £1,260 a year in interest (wrong, cos of capital repayment, but not far off). So it's no surprise that it's better over 2 years despite costing £1450 in fees!
    Originally posted by ThePants999
    Interest only always a reasonable starting point if that does not come out better then no point in looking further repayment is always lower.

    When the savings are lower closer scrutiny is advised.
    • uF0n
    • By uF0n 11th Jun 17, 5:12 PM
    • 4 Posts
    • 1 Thanks
    uF0n
    • #9
    • 11th Jun 17, 5:12 PM
    • #9
    • 11th Jun 17, 5:12 PM
    Thanks for the input! No one straight out says "Option 2 is better", but this is what I believe I'm reading - correct?

    @ThePants999 and @Thrugelmir, I am definitely on board with your comments. When I made my own spreadsheet at the start, to compare options, I was entirely focused on the interest (ignoring repayment), with the attitude that I should select that deal that incurs the lowest interest amount. However, we then spoke to a mortgage adviser who told us to only focus on the cost (i.e. money paid out of pocket) over the 2 years.

    The other things I've really learnt over the past week is not to underestimate the cost of moving to a different lender. I was all for moving to HSBC or YBS, that both have lower interest rates and comparable fees, however, the switch would have cost around £1000 in conveyancing (the biggest cost), valuation fee and several smaller expenses... as a result, I've decided to stay with First Direct.
    • uF0n
    • By uF0n 11th Jun 17, 5:29 PM
    • 4 Posts
    • 1 Thanks
    uF0n
    Also, why is the bank telling me that capital will be the same after 2 years whichever deal I take. Are the advisers ignorant, ill-informed, or, worse, trying to put people on the deal that is better for the bank?
    • getmore4less
    • By getmore4less 11th Jun 17, 6:06 PM
    • 29,141 Posts
    • 17,428 Thanks
    getmore4less
    you have 2 complaints in the making,

    we then spoke to a mortgage adviser who told us to only focus on the cost (i.e. money paid out of pocket) over the 2 years.
    why is the bank telling me that capital will be the same after 2 years whichever deal I take.
    Get them both in writing that sort of nonsense needs stamping out.
    • ThePants999
    • By ThePants999 11th Jun 17, 9:51 PM
    • 710 Posts
    • 791 Thanks
    ThePants999
    For SOME people, the amount they pay out over the two years IS the most important factor - they want to minimise their short-term outgoings. Bit of a silly default position IMO, though.
    • getmore4less
    • By getmore4less 12th Jun 17, 8:06 AM
    • 29,141 Posts
    • 17,428 Thanks
    getmore4less
    For SOME people, the amount they pay out over the two years IS the most important factor - they want to minimise their short-term outgoings. Bit of a silly default position IMO, though.
    Originally posted by ThePants999
    There are only 3 variables anyway.

    The 2 key ones are the amount you borrow and the rate, they determine the interest.

    With low rates the cost of delaying capital payments is relatively low.

    £100k @ 3% interest only, £250pm

    if you look at repayment over a given period and the cost of delaying the capital by 2 years( followed by the different monthly payment)

    40/38 £71,833/£73,715 £358/£368
    30/28 £51,778/£53,930 £422/£440
    25/23 £42,264/£44,557 £474/£502


    For many the future income profile means delaying the capital payments to do other things is good value as the mortgage debt is likely to be the cheapest borrowing they can get.

    catching up is also not that expensive to have a 2y interest only cost the same as the 25y term needs a payment of £522 after the 2 years.
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