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

rmac_3

We have two years left of our fixed rate of 5.69% (taken out a year ago). Redemption penalties are 2% (on £112000 = £2240). Therefore, the calculator predictably tells us we need to be on a rate lower than 4.69%. This makes total sense since paying 1% less per year would roughly cover the 2% cost over the course of the 2 year fixed period. This is a rough calculation I had done myself and I was thinking it was worth switching.
BUT....
Our mortgage is £112,000. Our current monthly payments are £800 at 5.69%. However, monthly payments at 4.69% (using various internet calculators) are £743 over the same period. This adds up to a saving over the 2 years of only £1348 ie nowhere near the required £2240.
What is going on here? Why do my monthly payments not drop by more ie. 1% x 112,000 / 12 = £93.
I've been going round and round in circles on this - please help!

MSE_Martin

Marky Mark

Now I get you - I think we can do this without too much effort by phrasing of the calcs outcome... saying something like

"You will need a rate consistenly below xxxx" type thing.

Although the third bullet directly below the calculator explains this point too

MarkyMarkD

Thanks Martin - yes, that's basically what I meant. It's definitely the consistent bit which might otherwise catch people out.

@rmac's question - it's because repayments on a repayment mortgage assume the rate stays the same throughout. So although you are not saving as much as you would expect on the monthly payments during the two years you would actually save money in the remaining years too because the capital balance at the end of two years at 4.69% will be less than the capital balance at the end of two years at 5.69%.

It's hard to explain, but suffice it to say that the mix between interest and capital is different for every interest rate. I suppose it's pretty obvious really - at 0% interest, all of your payments are capital; at a huge interest rate, most of your payments are interest. So at 4.69%, a higher proportion is capital than at 5.69%.

tyllwyd

tcaratella wrote: »

Hi, i have just got off the phone to nationwide and they have told me i cant come out of my 5 year fixed rate of 5.63% (3 and a half years left to go). ... i really dont want to keep paying 5.63% for an another 3 1/2 yrs when i could be paying half!!! AAGGGHHH!!

But for the Nationwide's BMR to stay at 2.50% for the next 3 years you are assuming that the BoE rate will stay at 0.5% for that time ... do you think that is realistic? If the rate creeps back up over the next three years, the effect of any savings will decrease - so it is probably a bit too soon to be tearing your hair out. And remember you've already made savings over the first part of your fix.

dunstonh

tcaratella wrote: »

Hi, i have just got off the phone to nationwide and they have told me i cant come out of my 5 year fixed rate of 5.63% (3 and a half years left to go). When the rates dropped i called early in the year and the actually told me i would need to pay £3000 for my erc. Now they are saying they are not allowing customers to move from fixed rates at all and wil have to let them expire naturally. I AM FURIOUS :mad: because the advisor at the time said i could move, would thy still honour it as there might be confusion with members of staff about what regulations are in force at what time, mmmmm anyway if anyone else is in the same boat, please share. i really dont want to keep paying 5.63% for an another 3 1/2 yrs when i could be paying half!!! AAGGGHHH!!

Nationwide are probably protecting themselves from future mis-selling complaints. We have received compliance warnings over advising people to come off fixed rates by paying fees to go onto variable or tracker. It has the potential to come back and bite you on the bum later on when interest rates start to rise and tracker/variable goes higher than the fix you were on to start with.

The decision to ditch and switch is a judgment call which may or may not pay off. The British consumer doesnt seem to understand that judgment calls aren't always right and if rates go up in future and all those that switched and ditched lose out will probably go looking for a template letter claiming mis-sale.

sometimesaver

Am I doing this right? Currently owe just under £28000 fixed at 6.2% until August 2013. Looking at A&L 5 year fix at 3.99%. Early repayment of current deal is approx £800. Using the calculator at whatsthecost the difference in August 2013 is £821. So while my monthly payments would come down, with my early repayment fees I'd be no better off. Or have I not got it?? The way I worked it out I'd save approx £32 a month in payments over 52 months (£1664) less early repayment (£800) so approx £800 better off. Or does this assume keeping my payments the same? Sorry I'm confused!

tyllwyd

When you say 'the difference', what do you mean - are you looking at the reduction in the capital outstanding at that point, or the amount of interest you would have paid up to that point, or both added together?

sometimesaver

tyllwyd wrote: »

When you say 'the difference', what do you mean - are you looking at the reduction in the capital outstanding at that point, or the amount of interest you would have paid up to that point, or both added together?

I mean the difference in the balance outstanding.

tyllwyd

So on your figures won't you pay £1664 less in total on your monthly payments, plus an extra £821 off your capital, minus the £800 early repayment charge, so you'd be about £1684 better off?

(but I don't really understand the calculations so please don't take my word for it!!)

MarkyMarkD

My fag packet calculation (which assumes interest only, but not much difference in the early years of a repayment mortgage) would say that you are saving around 2.21% on the difference in rates. So based on a 3% ERC, it is brain-numbingly obvious that it's worth ditching and switching as long as there are no switching costs at all: the pay-back period is under 18 months and you have over 4 years to go.

Even better, you are pretty much matching up the fixed rate period - although the A&L fix is slightly longer, that isn't necessarily a bad thing if you are comfortable that 3.99% will be an OK rate for the extra few months you are adding (and I'd think that it was pretty reasonable for a few months in 2013-2014 by which time rates might have rocketed).

All in all, a great "ditch and switch" success case.