Moving-two possible Mortgage Offers-Help!

Paced_Out

Hi All,

we've sold our house and had a mortgage meeting and would appreciate everyones help with the following conundrum!

We have 87K on a fixed rate at 5.28% with just over a year to run.

We are looking to borrow another 80K, we have two options:-

Option 1:

keep 87K on existing deal at 5.28% with just over year to run, then it would revert to a deal where we are guranteed to pay no more than 2% above the base rate. So if rate stayed the same it would jump down to 2.5%

Then take additional 80K on a new three year fix at 3.89%

meaning we don't have to pay a redemption fee of £2500K.

Or

Option 2:

Repay existing mortgage deal and take out a new deal for the full amount, approx 170K on three years at 3.89%.

We would have to pay a redemption penalty of £2500K. that could be paid cash but could be added to the mortgage. If added we need the 170K above, but if we pay from our ISA savings we only need to borrow £167K. However we damage our liquidity that helps me sleep at night in case I come out of work or need emergency cash fo some reason. We have £7,500K in the ISA.

Downside is when 3year deal is up this would not be on the same deal as Option1 where we would have the 2% above base rate cap, it would be on a SVR so currently would be 3.99% if rate stayed the same, but obviously could increase and no capping of 2% above base rate would apply on this deal.

Any ideas?

Option 1 would be more expensive for us intially, but would decrease when the half fixed at 5.28% fix ends, but only assuming base rate stays low. The other half would still have 2years of fix left.

Option 2 would be cheaper intially for the three years and make it easier to swollow for those first three years and give us peace of mind. But at the end of the three years we would be at the mercy of the SVR at the time with no "above base rate 2% cap". That said my car loan would fortunately finish at the same time giving us about £350 room to play with should the rates have risen. Wouldn't be able to replace the car though :-( if the SVR was high at the time and we couldn't get a decent new fixed rate three years from now.

PS - Option 2 rolling in the £2500K to save us using existing savings would increase the overall replayment on the loan over the entire duration by £4K, so would effectively cost £1500 for the privillege of hanging onto all of our savings and rolling the redemption penalty into the new mortgage.

For every 1% increase in the base rate we would be looking at our mortgage increasing by £80 per month when the fixed rates end.

Sorry for the long post, we would really appreciate peoples thoughts on the above.

Thrugelmir

2% above base is a good capped rate. Also an £2,500 ERC is more than the interest saved by switching to option 2.

So I would opt for Option One. However I would overpay the fixed rate element at 5.28% as much as possible on a monthly basis. As opposed to saving further funds into the ISA. As this will earn you a far better rate of return.

Paced_Out

Hi Thrugelmir,

Thx for the reply. My only concern there is that I would have half the mortgage moving from a fixed rate in 14 months with the uncertainty of what the rates will be at the time.

Also the reason for wanting to preserve cash in the ISA is for protection in case I come out of work etc.

Interesting to hear that you think the cap at 2% is a good one.

thanks,

Thrugelmir

Paced_Out wrote: »

Also the reason for wanting to preserve cash in the ISA is for protection in case I come out of work etc.

Hi,

If in doubt be cautious. Stay put for a while and pay down your existing mortgage than increase your borrowing level now.

Though if you've sold your house already then its rather late to make that observation!

Fixed rate mortgages are very much down to personal preferences and circumstances. There's not right or wrong decision.

There'll be very few sub 2% above base rate mortgages in the years to come. So it is something to consider when deciding to give it up.