Already thinking 2 years ahead and things don't look good!

zAndy1

Hi,
Ok, bit of background. Went bankrupt in Sept 05, discharged Feb 06. Remortgaged with a sub prime lender (DB Mortgages UK) last August, house valuation at that time was £175k, mortgage taken out was £166k on an interest only basis. Fixed rate for 3 years, redemption penalty if paid off during that time is £9k. Rate increases to approx 3% above SVR when the fixed rate ends. Current payment including mortgage life insurance is near as damn it £1100pm. I am worried for a few reasons a) We aren't making a dent in what we owe as it's interest only b) We remortgaged when prices were pretty much at their peak so I can only assume we're in negative equity now. Having said that advertised property prices in our area do seem to be holding up i.e. similar properties are still being advertised at anywhere between £180k and £190k. Obviously I don't want to end up at the mercy of the subprime lender we're currently with and paying 3% > SVR (which would be about 10% on current rates) in 2 years time. So we obviously need to get ourselves into a position where we can remortgage. Our disposable income will be increasing quite significantly in the next month or two and I reckon we should be able to save £800pm quite comfortably. Would the best plan be to just save as much as possible in e.g. an ISA for the next 2 years with a view to using that saved income to pay towards a remortgage (i.e. reduce the amount we'd need to borrow when remortgaging)? Should we see if we can change to a repayment mortgage (although not sure whether that's possible during our fixed rate period, need to check that one)? Any other solutions we should be looking at?
There's a few things we need to do to the house really, new kitchen, garden needs sorting out etc but I'm reluctant to spend a lot on the house due to not being confident we'll be able to remortgage, having said that would it be money well spent in terms of increasing the valuation when we do come to remortgage or just money down the drain?
As you can see, lots of questions, I know I shouldn't really be worrying about this when we're only 1 year into a 3 year fixed rate but I am already thinking ahead and I am worried to be honest. At the time we remortgaged I just assumed prices would remain static or increase over the course of the 3 year fixed rate and that 95% LTV mortgages would still be available in 3 years, of course the picture has changed considerably in the last 12 months hence my concerns. Any advice gratefully received

Cheers
Andy

Toughluck

At least DB offer an overpayment facilty and they will allow you to port your mortgage. Lots of sub prime lenders will not allow you to do this. DB in my experiance were not a bad lender when they were doing sub prime deals.

Honestly Andy, it is all academic as you have pointed out until nearer the time. So many things may change in your life in that time and that massive ERC scares the hell out of me.

With regard to converting your repayment method to repayment, a very wise move if you can afford it. The will probably charge you a fee for this but I would be amazed if it was even £100!!!! (not knowing for sure though).

zAndy1

By 'port your mortage' do you mean transfer it to another property? It says in the key facts about the mortgage that 'the mortgage is not portable to another property'. The mortgage was originally obtained with moneypartners and was then immediately transferred to DB UK on completion (which confused me no end!).
The fixed rate is 7.61%, at the end of the fixed rate interest will be charged at a variable rate plus a fixed margin of 3.44% (ouch!).
If any part of the mortgage is repaid during the first 3 years an early repayment charge will be made of 6% of the sum repaid (which means a max early repayment charge of £9,971.52 if the mortgage is paid off in full).

Thanks for the reply btw

Cheers
Andy

Toughluck

Hi Andy,

"Porting" - Take the mortgage from one property to another without incurring the redemption charge (as long as T&C's are maintained).

I put quite a lot of busniess thru them not too long back as they offered relatively decent products for applicants with arrears and CCJ's.

You probably have a good rate with them compared to what is available now so sit tight and ride this sh*t storm with the rest of us!!

zAndy1

I'm going to ring DB mortgages and ask about the possibility of changing to a repayment mortgage , I assume we'd be better doing that than putting the money into an ISA or something similar as we wouldn't earn as much interest as we'd be saving?

zAndy1

I've checked and it is possible to change it to repayment, costs £75 to do that and the monthly payment would increase by approx £200pm. So if we did that would I be right in saying that we'd reduce our outstanding mortgage by £200 x 24 = £4800 by the end of our fixed rate period (on the basis we've got 2 years left on our fixed rate) or would it be more than that as we'd start paying less interest as time went on? Sorry if that's a daft question!

So would we definitely be better off doing that than investing that £200 somewhere?

Thanks,
Andy

Conrad

You wont necessarily reduce it by £200 per month as lenders tend to employ logarithmic scales which front loan the interest and back load the capital. It suits most people fine though, so probably not worth worrying about.

You will find it difficult to get net of charges and tax returns above the mortgage rate, especially over the short term, so no I would not bother investing the difference.

zAndy1

But if I'm paying £200pm more than I'm paying now and currently we're paying the mortgage back on an interest only basis then surely the extra that we're paying is reducing the capital by the full £200pm? And after the 1st month the interest will be ever so slightly less (as the capital will be £200 less) so we'll reduce the capital by a bit more than £200 and so on? Or am I completely missing the point?

EDIT: When we arranged our mortgage it was with moneypartners and the mortgage was then taken over by DB UK, the 3.44% above SVR after the fixed rate would have therefore been a moneypartners condition and not necessarily a DB UK one. Assuming we keep paying every month until the end of the 3yr fixed rate period do you think it would be feasible to go onto another fixed rate with DB UK (at a similar rate to what we're paying now ideally) and if so would that have to be at an acceptable LTV or wouldn't it matter as it wouldn't strictly be remortgaging as such? Might ring em and ask but wondered if anyone had any experience of this?

zAndy1

Received a letter today about changing the mortgage to a repayment one instead of interest only. In the letter it says changing to repayment will mean our payments increasing from £1053pm to £1256pm. It also says when our fixed rate end on 30/8/2010 our new monthly payment based on todays SVR will be £1465pm (rate will be SVR + 3.44%)! I'm assuming that figure is based on our current interest only payment. Obviously I really don't want to end up being tied to that rate so remortgaging will be very important, hence my concerns about the way house prices are going.
Can somebody please clarify something for me, will we reduce the amount outstanding on the mortgage by £203 every month or will we start to reduce it by more than that as the mortgage balance reduces and therefore the amount of interest reduces? What I'm getting at is what will reduce the amount we owe on the mortgage the most over the course of the next 2 years, changing to repayment and paying £203pm extra on the mortgage or saving that £203pm in a savings account (ISA or nationwide e-savings for example) and at the end of the 2 years putting the amount saved into the re-mortgage pot effectively reducing the amount of mortgage we'd need to take out.

getmore4less

If you go to repayment the capital will start reducing by more than the new extra payment.
try www.whatsthecost.co.uk it has a mortgage calculator that shows this.

Good idea to look ahead and things can change so it is a bit of guess work on what is the best solution.

I would start with the issue of the followon rate, this is a lot and the key here will be can you afford this.

If you can then it is not going to be a disaster,

If it is going to be hard, then I would think carefully about going to a repayment, it may be that saving the money rather than overpaying might be a better option allthough if you think you will have £800 spare this is less of an issue

By saving you give yourself a pot of money and can choose at the time to either pay down some of the loan without penalty or use the funds to help out paying the new higher rate.

Based on your numbers. with £800pm available

£166k 7.61%
interest only 24y £1052.72
repayment 24y £1256 £200 more. after 2 years you have £160,745.44 left

paid off £5255

and in the bank(4%) 600*24 £14966+5255 £20221
or in the bank(4%) 800*24 £19955 £266 less that if you go to repayment.

So to me the question is would a new lender look at you if you had more savings or less savings and a lower mortgage, not sure.

If you are really sure that you will have £800pm spare then you could reduce the term as well as go repayment. paying £1852pm would reduce the outstanding ballance to £145350.93 a total of £20650 so another £400.

For me I think building up a significant emergency fund is probably a sensible move it would not take much to push you ever the edge again and having 12months spends including the high mortgage payment in the pot gives a good comfort zone maxing our the mortgage save a couple of hundred quid.

If in two years theres is a lender with decent rates then paying down the loan to get this rate and rebuilding the savings will be worth doing if income is looking secure.

I tink you could do better than the 4%net on savings with use of the monthly savers and ISAs so the saving by paying down the loan and losing access to the cash is even less, the security of not being short of cash is not costing a lot.

zAndy1

Thankyou for that very thorough and useful post. I think I'm going to save as much as possible in either an ISA (if I can get one) or my nationwide e-savings account. It will be nice to have some savings for once in my life and having £20k in the bank in 2 years time should definitely help us remortgage.