Stick or Twist? Young couple need advice, pls help :)

Thrifty360

Hello everyone, I'm a long time reader of this forum but a first time poster. I've always been impressed with the quality of advice offered here, I wonder if you can help my wife and I?

Short Version:

• Is it worth taking out a loan to reach the golden 75% LTV threshold for a remortgage?

• Current mortgage is a 6.5% fixed rate 100% LTV for £157k. We have three years remaining on this mortgage deal.

• Should we move to a new 2.99% tracker 75% LTV mortgage for £135k and pay off the remainder of the £157k mortgage with a 4 year £22k loan? (Our monthly payment will remain almost exactly the same as it is now, plus we'll gain £22k in equity.)

Full Version with details:
We got a 100% interest only mortgage in Oct 2007 (The very month that things started to go belly up.) The mortgage is for £157k and our rate is fixed at 6.5% for five years. So we currently pay £860 per month.

I've obviously been desperate to get out of this mortgage for some time. I contacted our lender -Mortgage Express- in January to ask if they would waive their early repayment charge of £8000 if we left. To my amazement, they said they would. (Shortly thereafter they sent out a letter to all their customers saying that from Feb 1st they would waive ALL Early Repayment Charges. There is no defined end point for this offer, but they reserve the right to rescind it some point in the future. The reason for this generous offer is Mortgage Express are part of Bradford & Bingley, who have been nationalised and are looking to 'shorten their books'.)

So we successfully applied for a new mortgage with the Abbey, a 2.99% tracker. The house was valued yesterday and the surveyor came back to us with a value of £180k. Three estate agents valued the house on Monday and their valuations were all between £195-£200k which were in line with our expectations. Understandably, we're gutted as based on the surveyor's valuation we would have to take out a hefty £22k loan to still get the new mortgage. (Because we can only get that mortgage if we have 25% equity.)

Mathematically, going for the new mortgage and loan option is clearly the winner. If we stay on our current deal we'll continue to pay £860 a month and in three years we'll still owe £157k. If we take out the £22k loan and move to the new mortgage we'll pay almost the same monthly amount but in three years the mortgage will be £22k lower, therefore we'll have a good chunk more equity. Sure, we'll continue to pay the loan for a further 12 months, but all the while we are lowering our mortgage by over £500 per month so I don't see that as a particularly bad thing.

All in all, it seems to stack up well to me. I 'm just a bit anxious about the prospect of having a £135k loan AND a £22k loan as well. (Even though our total debt will remain the same - £157k.) It 'feels' like a big step to saddle us with a £22k loan.

Am I being foolish? It this the right thing to do? Is there anything else I need to consider?

Thanks Guys!x

Conrad

Seems emminently sensible to me. Watch out for Abbey - they do things like check to see if you've taken a loan just prior to completion, on some cases and this could then trigger a decline due to thier wierd affordability model.

Thrifty360

Great, thanks for the feedback Conrad

beecher2

You're sums are based on the BoE base rate staying at 0.5% for 3 years which seems very unlikely. Work out what your payment would be if and when base rates rise.

Thrifty360

A good point Beecher. For every 1% increase in the BoE base rate this new mortgage will increase by £119. We could handle it, within reason.... (Up to 2-3 points even.) It would take a pretty drastic hike in the base rate to offset the >£500 per month gain in equity.

That said, the base rate can only go one way. Surely it won't skyrocket within the next three years though? (Fingers crossed...)

FYI - Here's a graph I found charting UK interest rates since 1985. (Damn, I can't paste the link due to MSE's spam-blocking of newbies, so here it is without the 'www' prefix: "propertyinvestmentproject.co.uk/property-statistics/interestrates.php"
(We'd be knackered if the rates rose to 15% again!)

beecher2

most people would be knackered at 15%, and don't let it put you off your plan, but keep it in mind and remember the 'norm' is 5% or so for base rates.

Thrifty360

Will do, that's a good shout, thanks for your input Beecher.

Pee

A slight note of caution, I would only take the loan route if I was very sure that neither of you would lose your jobs i.e redundancies or even pregnancy.
The reason i say this is there is a lot more help for you with regards a mortgage than a loan, if you do get into difficulties. Otherwise, it's a great idea.

Thrifty360

Pee wrote: »

A slight note of caution, I would only take the loan route if I was very sure that neither of you would lose your jobs i.e redundancies or even pregnancy.
The reason i say this is there is a lot more help for you with regards a mortgage than a loan, if you do get into difficulties. Otherwise, it's a great idea.

Thanks for this Pee. We will be trying for a baby next year actually, my wife hopes to then work part time. We've done the sums and can still manage.

I'm intrigued, what is the 'help' you refer to that is available for those in mortgage difficulties? (Because I assumed we'd be equally up the creek without a paddle with a loan and mortgage. A mortgage is basically just a whopping big loan anyway, no?)

Thrugelmir

The B&B is unlikely to rescind the decision to waive the ERC for the foreseeable future. So no concerns on this point.

Your suggestion only seems to have downside no upside. As there is no change to your monthly outgoing. You will be exposing £135k of your mortgage to a variable rate for the next 3 years. While BOE base may remain low for it to remain unchanged for another 36 months is the most unlikely of scenarios.

Perhaps a better solution is to visit any boards on the forum and obtain money saving tips. As the best way of saving interest is to pay less. To do this you need to overpay every month . however small the amount.

Overtime the overpayments will compound and accelerate the repayment of your mortgage. Obviously increasing LTV.

Thrifty360

Thrugelmir wrote: »

The B&B is unlikely to rescind the decision to waive the ERC for the foreseeable future. So no concerns on this point.

Your suggestion only seems to have downside no upside. As there is no change to your monthly outgoing. You will be exposing £135k of your mortgage to a variable rate for the next 3 years. While BOE base may remain low for it to remain unchanged for another 36 months is the most unlikely of scenarios.

Perhaps a better solution is to visit any boards on the forum and obtain money saving tips. As the best way of saving interest is to pay less. To do this you need to overpay every month . however small the amount.

Overtime the overpayments will compound and accelerate the repayment of your mortgage. Obviously increasing LTV.

Hi Thrugelmir, thanks for your suggestions.

The upside will be we'll be £22k better off in equity than if we stay on our current deal.

I appreciate that any rise in BoE base rate will affect our payments, indeed I expect the base rate to rise, but not to the extent where it would offset the £22k gain in equity this would give us. Provided we can accomodate any potential increase on the £135k mortgage payments on a month-to-month basis we should be ok.

I don't quite understand the latter part of your post I'm afraid. How would money saving tips help with this decision? Do you mean they would help because they would allow us to save money with which to then make overpayments?