Help needed!

CFC

Hello all,

I could do with some assistance in my calculations.

I need to remortgage in June. I have been offered a 5 yr fix at 4.19 or a 10 year fix at 4.89.

Current mortgage balance is 63170 fixed at 5.19 and I overpay £100 a month at the moment. Current length of mortgage is around 19 years.

OK here goes. :

Unless my circumstances change I intend to pay £500 a month regardless of my 'minimum payment'

I might be better going for the 10 year fix but of course that certainty has a price. I am interested in how much I would save over the first five years if I picked the 4.19 compared to the 4.89.

What I'm trying to get at (not being a mathematical wiz) is - in 5 yrs time interest rates may go up or down. I'm sure there's a way of calculating how much interest rates would have to rise in the 2nd tranche of 5 years to make the two costs come out equally ie

if i take the 5 year fix and for the second five years I have to fix at 5.2% for the next 5 years, how much would this cost me over that 5 years, so how much better or worse compared to taking the 10 year fix now? In fact, turning it round - at what interest point for the second 5 years would it need to be to equal the 10 year fix over the same time period?

eg if it came out at something silly like 7%, then I'd be better taking the 5 years and having the flexiblity because that would actually save me money.
if it came out at 4.6%, then I need to consider whether I believe that I will be able to get that rate in 5 years time.

Sorry if this sounds confusing, my mathematical brain is failing me. I've played around with some calculators but I'm just not getting the answer that I need.

any and all thoughts on this perplexing issue would be of help.

Help please!!!

StuartGMC

CFC
I'll try to give a quick reply.

If you run your "favourite" spreadsheet to do the calculations firstly get your comparison at 5yrs for both options. This should allow you to see the lower capital remaining on the 4.19% because you are overpaying more per month than at 4.89% if you pay £500 into each per month.

You can now run the calc to show where you'll be on 10yrs at 4.89% so you can now take the result from the 5yr @ 4.19% output and use as input to a further 5yr clac and tweak the interest rate until the balance outstanding at 10yrs from now is the same if you continue to pay £500 per month.

Do either have different overpayment restrictions and ERCs? These may influence your view. Overall, interest rates are historically low and whilst it is so very difficult to predict what will happen over next 18months, I think most believe interest rates charged on mortgages won't go lower?

Good luck
HTH

CFC

Thanks Stuart, which calculator do you think is best, some of them don't seem to be very accurate. I'm new to all this, it only just struck me while I was considering it yesterday that this was a way to look at it and so there must be a way to calculate it out.

I think that they have the same overpayment restrictions ie 10% overpayment a year is ok. I don't know what ERC means?

PS I am seriously thinking of reducing my mortgage length to 16 years. I've only just realised that it is better to overpay at the start than the end (told you I was maths incompetent!) so is it better to

a) have a shorter mortgage term and over pay less (max limit being around 500 pm total payment)
b) have a 19 year mortgage term and over pay more (see above)
c) or does it all work out identical no matter what you do?

Yours extremely confusedly.

CFC

StuartGMC

ERC = early repayment charge (sorry should never assume every acronym is known )

For spreadsheet you can trawl the sticky at the top of this board but one which may help is LocoBlade's discussed in:
http://forums.moneysavingexpert.com/showthread.html?t=1157173&highlight=loco

We're below the "cut-off" for moving a mortgage, typically £30k and perhaps something not everyone considers. You may want to throw into the mix consideration of offset, which gives great flexibility in repayment etc?

In response to your other points, if you reduce your term then your minimum repayment required will increase, can you be sure you can maintain at that level, or, stick with the existing term, overpay to the 10% then decide in 5yrs which term is suitable to finish off the mortgage early? For the same interest rate, it doesn't matter if you repay either in the same time frame, but charges could differ because one will be repaid early.

In your position, I would be tempted to stay on the 19yr as you indicate your £500 per month is the max you can achieve; what happens when additional bills have to be covered? This may also influence your decision on fixed duration if only to give you confidence of affordability - if you do that, ignore interest rate movements for others, solely concentrate on improving your own cash position etc.

dimbo61

HI CFC,
If you took the 10 year fix and reduced the term to 10 years it would cost you £666.62 a month!
Mortgage free 9 years early and no more remortgage fees. Total cost £79,995 over 10 years.

CFC

Thank you Stuart, very helpful. And thank you to you Dimbo, I did consider this but in uncertain times I wouldn't want to be paying £666 a month - not to mention the devil's number LOL (I knew those bankers had a sniff of sulphur!)

I think you have an excellent point Stuart - at the moment £500 is comfortable, but if redundancy should loom then it wouldn't be so comfy. Nobody knows what is going to happen over the next 5-10 years. I also didn't know that if a mortgage was below 30k that nobody else would want it.

StuartGMC

CFC
The £30k is just a "typical" lowest value to move depending upon the lenders, your existing lender may well offer you a product close to the threshold or just keep you on SVR. Also the fees then become a "significant" % of what you owe which may again mean you won't save even if you move products.

Do keep us informed of your progress, a diary here can really help you to improve on your plans as I have found and there is great support from everyone else irrespective of the plans you have to repay early.

CFC

Thanks Stuart I appreciate your input. Having thought it over I think your advice not to reduce the term is wise. If the worst came to the worst (there are so many redundancies around at the moment) and I had to swap to interest only repayments for a while it would obviously be better to have that payment as low as possible. And as you say, I can choose whether to swap the term down and/or pay off a lump sum on the mortgage when the mortgage is up for swapping again.

Now my only area of indecision is whether I think that a 10 year fix or a 5 year fix is the best idea. I'm starting to think that perhaps 5 years is a good compromise between flexibility and lower interest.

dimbo61

HI CFC,
The difference between the 4.19% 5 year fix and the 4.89% 10 year fix is £34 a month on a 19 year term.
So your new monthly mortgage should be about £402 at 4.19% and £436 at 4.89%.
How much you can afford to overpay and are allowed to overpay is up to you and your lender!!!
No one knows what rates will be in 5/10 years so its your call on which deal to take but if you can afford to overpay each month its a good habit to get into
GOOD LUCK

dimbo61

Sorry wrong on my maths !
Are you paying abour £436 at the moment on your existing deal at 5.19%?
At 4.89% you would be paying £426 a month.
So only £24 a month difference in the 2 deals.