Reducing capital while constantly remortgaging

Best_deal_seeker

I have read much about the merits of remortgaging on a regular basis after fixed periods at lower interest rates and I can see how the benefits are reflected in the monthly repayments. But how does this affect the capital that is owing on the mortgage as I hear that very little that is repaid in say the first year, actually reduces the capital outstanding- just contributes to the interest. I am currently considering a 4.99% repayment mortgage fixed for 2 years for £120,000 over 25 years (very good in the current climate). If I choose to switch to a better fixed rate with another lender at the end of 2 years, how much is likely to have actually been paid off the mortgage? and if I continue to do this for the next 10 to 20 years, will I ever be mortgage free? Is there a catch that negates the savings on monthly repayments?

Best Deal Seeker

lisyloo

and if I continue to do this for the next 10 to 20 years, will I ever be mortgage free? Is there a catch that negates the savings on monthly repayments?

If you remortgage after 2 years then you should go onto a 23 year term and NOT 25.
If you go onto 25 you will never be mortgage free.
You must keep the term the same as your remaining term and not extend it.

Remortgaging every 2 years is no longer the "done thing" because fees are now high.
For many people it now makes sense to get a longer term deal.
There will be exceptions (like huge mortgages) but in general it makes sense to get a longer term del than 2 years these days.

lisyloo

Have a look at the graphs here

http://www.housepricecrash.co.uk/forum/lofiversion/index.php/t27616.html

They show that repayments of capital accelerate over time.

What you have to picture is that with your remortgage, you are not joinging the graph at the beginning.
If you shorten the term from 25 to 23 years then you are joing 2 years in (so exactly the same point as if you didn't remortgage). All you are doing by remortgaging is getting a better rate to reduce the interest.

Does that make sense, seeing it on the graph?

payless

As Lisyloo says so long as you don't extend your term, its make no difference- the " you don't pay off much in the first years" arguement ( whilst correct in some ways) was used incorrectly as a way of getting people to go interest only (endowment) rather than repayment .

bigbloke45

What you have to do is to think of your loan as a fixed period of 25 years from the outset and not who it is with.

So, every time you remortgage you must only remortgage for the period of time outstsanding from your original "fixed" period. E.g after 2 years, only remortgage for 23 years, after another 2 years, only remortgage for another 21 years... get the picture?

But it it MUST only be for the outstanding loan and no more!.

Provided you don't increase your loan, you will pay off in the original 25 years, regardless of how many lenders you have used.

As an example, if you borrow £100,000 at 5% over 25 years (on a repayment basis) payment would be £584.59 per month and, after 2 years, your outstanding loan would be £95,770.71. You would have paid £9,800.87 interest.

If you then remortgaged at 5% on the £95,770.71 over 23 years, you monthly repayment would be STILL be £584.59.

I suggest therefore that you ought to factor in the costs of remortgaging which, as lisyloo has said are much more than they used to be.

One last thing, I really recommend that you get up to speed on compound interest. The best way, I firmly believe, is to buy a financial calculator; there are three main brands; Hewlett Packard, Casio and Texas Instruments. I would go for HP; for about £30 you will get a superb machine.

Once you have one and have used it (and read the instructions!), it will set you free. In a short time, no-one will be able to pull the wool over your eyes! The only problem you might have is boring your friends with your fianancial "savvy" - a small price to pay.

Good luck.