Working out interest on comparing fixed rates

frugalfreda

I see that rates went up yesterday, eeek! Our fixed rate ends at the end of January.

I see Halifax is doing a good fixed rate of 4.49% BUT the product fee is huge - 3% plus £245 mortgage account fee, a non-refundable property assessment fee and legal costs.

I will have approx. £125,000 outstanding then - probably a bit less than this actually - so 3% will be £3,600/£3,750 so we are looking at coughing up at least £4,500 upfront (they can add it to the account but no I would rather scrapple around for the money beforehand).

How can I comparate interest plus amount paid off over a two year period on a term of 13 years on £125,000 with a fixed interest rate of 6% (I'm sure I can get better than this though, I hope) compared with the Halifax interest rate of 4.49%?

Just wondering if it is worth it. I may make overpayments as well over the 2 year period but can't say for sure.

Many thanks in advance.

tomstickland

It's a moderately involving job.
You can take the lump sum that you'll save via lower upfront fees and use that to instantly lower the amount borrowed.

I like to do a "true monthly cost" comparison, whereby the fees are divided by the number of months that the fixed rate lasts for, and this fee cost is added to the monthly payment.

getmore4less

MY prefered method is to set an amount owing at some point in the future(when the rate ends is a good date) and work out the cost to get each loan to that point using a standard calculator(iterating if needed)
www.whatsthecost.co.uk has a calculator that does the job.

You must add the fees to the loans that have them or borrow less on the those that don't or have smaller fees. this way the starting and end points are the same and whichever has the lower monthly cost is the winner.

SO for your options.

£125k loan, fees paid up front. 13 year repayment, 2 year fix.

option 1. 4.49% fees 3%+£249+ valuation+legal (say £4k+)
option 2. 6.00% NO fees

option2 would be borrow £121k, payment £1118.92pm and after 2y £107,930.13 outstanding.

to get option 1 to the same outstanding amount you need a payment of £1149 so option 2 is cheaper by £29pm and there is still the valuation and legals to factor in.

£696 (29*12)

another way is to make the payments the same and see how much is owing at the end not so good but easier to do in the calculator.
option1 £1120pm £108,652.53
option2 £1120pm £107,902.54

£650

A third way is to just plug the numbers in and look at the total cost pm and the end values.

option1 £1,059.21 £110,175.91
option2 £1,118.92 £107,930.13
lower payment £59.71*24 £1433
higher residual £2246.

Option2 is £813 cheaper

There are adjustments needed with method 1 and 3 to account for the lower payments

Method 2 is probably the best/easiest way to work out the relative cost/savings for most people since monthly payments are the same and there are no adjustments for saving the difference, the end number gives you the answer you need.

Method 1 makes sure the fees are paid off over the fixed period but you can adjust method 2 to make this happen with that as well.


When the terms are different it gets a bit more complicated because you have to factor in other unknowns. and make guesses as to what will happen at teh key dates.

One thing not to overlook is the follow on rates some lenders offer low follow on so can reduce future fees costs so slightly higher rate may be worth the reduced risk of getting stuck on a high SVR.