The "Should I Ditch my Fix?" Calculator Discussion Area

luciandan

I’ve looked at this for some time now as the rates have come down. It is really very misleading, because unless the difference is for the entirety of the mortgage you can only use the calculator if you are prepared to pay the ERC separately and not add it onto the entirety of the loan.

Let’s take dillydallydo’s example above (since you’ve asked for views on your situation).

Initially it looks like you’re saving £380 per month. The key mistake with this is that after the end of your 3 year fix, you would be free to move and be on the same rate anyway… except that with adding the ERC you will be paying more on the new mortgage for the rest of the term of the loan and potentially lose any savings you would originally have gained.

I can’t get to your figures exactly, but let’s say you have a mortgage of £288157 and you have 24 years left on it (which must be fairly close to your situation). At 5.19% you would pay £1772.55 per month. A mortgage of £296802 at 2.99% would be £1458.87 per month.

Let’s assume the very best case situation that for the rest of the term you manage to get a rate of 2.99% (very unlikely that you’d be that lucky).

This means that if you keep your mortgage you would pay:
((1772.55*12)*3) + ((1416.38*12)*21) = £420739.60

If you change to the new mortgage you pay:
1458.87*12*24 = £420154.60

That makes a grand saving over the lifetime of the mortgage of £585 !!!

And that’s assuming you’ve not paid a fee for the new mortgage.

One aspect that’s not considered in the above calculations, of course, is inflation. If you’re in the highly unlikely situation of finding a 21 year fixed rate at 2.99% after the initial 2 years, assuming inflation stays at about 2% you would save just under £3000. But who knows how the bank’s monetary policy will affect the underlying inflation and mortgage rates over the next 20 years? The bigger your mortgage is, the bigger the risk, and as you’ll be taking out a higher mortgage, you could very easily see that £585 benefit soon wiped out and lose much more besides.

On the other hand, you could pay that £8644 up front. If you manage to get a good mortgage after the third year, you could save around £4000 over the two years – if interest rates shoot up in the third year you’ve lost out.

In essence, those who are most likely to benefit from coming off the fixed rate would be those with very large mortgages over a very long period of time who can afford to pay the ERC in one go. And what bank’s going to give such borrowers a good deal in the current climate????

Daniel

tyllwyd

Aargh - having gone back to the calculator to see what figures it came out with over eight years (my remaining fix), because I'd put in three years originally by mistake thinking that was how long my ERC lasted ... and it doesn't go above 60 months.

tightyorky

Can anyone offer me a bit of advise please as I am looking at ditching my fixed for a reason that has only really been skirted around previously. I'm looking at swapping my £80000 4.7% 5 year fixed mortgage with 2 years left to go with a penalty of £2000 to a 10 year 4.75% with the Leeds Building Society. My thinking behind this is that surely the BoE base rate can't get much lower and that interest rates will rise and be significantly higher when my current fixed deal ends in 2 years time and so by taking the £2000 penalty now I'm on a 10 year deal which has been taken out when the interest rates were at their lowest.
If this helps any potential advisors I'm 32, married with a child, don't have any other debts and am looking to have totally or significantly paid off the mortgate using the permitted overpayments by the time this 10 year fixed is finished.
Is it worth my £2000 'gamble' or would interest rates have to rise drastically to make this idea worthwhile ?

MarkyMarkD

tyllwyd

The calculator expects you to put in the ERC term, and assumes that is the same as the fix period - because it will almost always be the same.

I can't understand why it doesn't go over 60 months - there's no good reason why not.

Regarding tightyorky's point, I don't think it's wise to bin a fix with only 2 years left to go. Fixed rates haven't come down as much as variable rates, and they won't likely rise as much either.

If you are overpaying as much as you state, then the impact of any rate differential won't be that great surely - whereas the £2,000 is an instant, real, cost.


I think anyone using this calculator needs to think "why did London & Country produce it?" The answer, obviously, is to get more remortgage business. Which is why it's designed in a not very good way, and is biased towards encouraging people to ditch and switch even when they shouldn't.

The absolutely worst thing anyone can do, IMHO, is to ditch and switch from a fixed rate they can definitely afford, to a variable rate which saves them a few quid only if rates don't go up again. That defeats the whole point of buying a fixed rate for certainty.

And of course, L&C (or any other broker) is quids in if the customer decides a few years into their new - not such a good idea - variable rate that they wish they were fixed, because they can churn them again. Bonuses all round!

Gorgeous_George

Some good points.

I'm sorry MSE but the calculator, in its current guise, is seriously flawed and should be consigned to the trashcan (IMHO).

Back to the drawing board.

GG

tyllwyd

MarkyMarkD wrote: »

tyllwyd
The calculator expects you to put in the ERC term, and assumes that is the same as the fix period - because it will almost always be the same.

I agree that it will usually be the same ... but it is not necessarily the same so if what they want to know is the remaining time left on the fix, why don't they ask that question?

Or if it is making an assumption like that, why isn't it explained? If the calculator is going to be heavily simplified, then why not give a quick list of the assumptions it is based on, so people can get a feeling for whether or not it is likely to be giving a sensible answer (ie based on a 25 year mortgage, that the ERC will apply for the remainder of your fix, that you are applying for a new fixed rate which will apply over the same period as your current remaining ERC period, that there is no application fee for the new mortgage ... is that all correct? Anything I missed?)

MarkyMarkD

Nope, I agree. It doesn't state any of its assumptions; it doesn't ask enough questions; and it doesn't even point out any of the risks. It's a bit rubbish.

At least it should add the following IMHO:

- how long are you fixed for
- how long are you tied in for
- what is the revert rate
- how long is your mortgage term
- is it repayment or interest only
- is the alternative mortgage you are considering fixed or variable
- what is the alternative mortgage's fixed/discounted/cheap tracker term
- what is the alternative mortgage's revert rate

Then it could actually tell you if that particular switch is worthwhile.

Simply telling you that x.x% is worth switching to is misleading and wrong. It's only true if both rates are fixed, the fixed term is the same, and the revert rate is the same. Hardly ever will all of these be true.

Former_MSE_Dan

Hi folks,

The calculator is a quick ready reckoner, intended to give people an idea whether it is worth even considering a switch. It is surrounded (and includes) by our strongly held belief that anyone who wants to take it further should get a broker to take them through all the details.

Also, we're hoping to get arrangement fees factored into the calcualtor soon, possibly by the end of today, or early next week if not.

Dan

Jostick

Did you know that if you took out a fixed rate mortgage with FD before 1/1/2005 you may well have been given an "interest rate guarantee" to prevent "rate shock" when the fixed rate came to an end. This, in my case, guaranteed that whatever rate the repayments defaulted to it would be no more than 1% above base rate.

So... thanks to the Fix My Ditch calculator which set me thinking and a chat with the nice lady at FD who happened to mention this guarantee (which I had forgotten about) I have cut my mortgage repayments by 60% with no fees, just the early repayment fee. I'm stunned!! The savings will repay the fee in less than 6 months.

madhouse

I have just phoned Natwest with a view to paying the redemption early and moving to another of their advertised rates for their existing cusomers. Natwest have told me that if I pay the redemption fee to get out early I would not be eligable for the new rates as they do not allow this. They have told me the new rates are only for customers not already on a fixed rate, even if I'm prepared to pay the redemption fee!!