Unusual Fixed Deal Ending Question

ADJAFC

Hi all,

This forum has always been really helpful whenever I've had a question, so I thought I might pose this one.

We have a mortgage with Nationwide which is coming to the end of its fixed rate of 6.25%, when it ends it will revert to 2.5% (2% above BoE rate) and then vary depending on what happens with interest rates.

In the short term this will save us approximately £380 a month while the interest rates stay the same, and therefore I'm not in an enormous hurry to fix, as the best rate we've been offered is 3.99%.

We have not missed a payment and always pay everything on time, however we've managed to build up quite a substantial debt elsewhere on home improvements. These are all being serviced and are on low interest deals (i think the biggest loan is 7.9% APR)

I am wondering whether we should drop onto interest only which would free up over £800 a month just for one year (while interest rates are low) which would give us an opportunity to clear our other debts, then go back onto a fixed rate shorter term at the end of the year. (by which time we should be able to significantly shorten the life of the mortgage).

My question is, a) whether people think this is a bad idea or a good one and b) whether we would need to actually change mortgage deals with Nationwide or whether they will allow us to change our current mortgage to interest only for one year.

Would really appreciate some input, as I say, we haven't missed a single payment, but we are creaking a little under the pressure of such large repayments.

Many Thanks in advance!!

getmore4less

What you need to read up on is snowballing.

This identifies the optimum way to pay off debts.

Normaly you would pay the minimum payments on all debts.

Then any surplus you throw at the debt with the highest rate.

Penalties may effect the order.

The thing is by going interest only on the mortgage and overpaying the other debts you are effectifly move unsecured debts to secured.

This is not a problem is the debt is under control and not likely to reoccur.

You say the debt is home improvements(all or some?) in that case you are in control and it would make sense to tacke the high cost debt first.


Why not have a look at debtfreewanabee and do a SOA, this may identify the best options and find other areas where you can trim spends.


I think everyone should do a debtfreewanabe style financial overhaul even those that only have mortgages, it is suprising how much you can often save.

luckyfool

a) It may or may not be a good idea, but even if you dont you should put the £380 per month already freed up into overpaying the more expensive debt

b) You dont need to change products, the issue is whether Nationwide will even allow you to switch to interest only. Most lenders are not allowing people over 75% ltv to change to interest only any more (if already on repayment), and some lenders such as Woolwich will not allow ANY customers to switch to interest only. Even if they do allow it there is likely to be an admin fee to make the change.

cheers,

Luckyfool

Dr.Shoe_2

I'd generally agree with most of the above. I'd just throw the £380 surplus at the biggest debt and leave your mortgage as it is because you'd save quite a lot of money in the long run.

However, it could be that the 7.9% loan is quite large in which case your initial proposal could be the cheaper option but you'd need to be funding a very large loan for this to be so and clearing all your other debts at £800 a month for a year implies that this is not the case.

Moreover, once your other debts are cleared you should overpay your mortgage by as much as you can afford while the rates are still low.

ADJAFC

Thanks guys, that is definitely a big help.

We were intending on using the £380 a month to clear some of the debt as soon as possible, but being a little impatient, £800 sounds better.

I've done some reading up on switching to interest only, and it seems like most lenders are now keen to avoid this.

I'll definitely give the snowballing thing a look and work it out from there. It appears there may be another option of taking a 1yr repayment holiday (if they'll accept us) and throwing our whole mortgage at clearing the debt, then doubling up on payments once they are all clear...

Needs some thinking about but thanks for your advice