Size of deposit vs mortgage rate

ag359

How much difference is there at the moment between interest rates for a 20% vs 25% FTB mortgage? Considering whether to start looking or save for a bit longer.

If it's relevant, we'd be looking at a house price of between 400k and 500k on a joint income of about 130k, so mortgage of between 300k and 400k.

Thanks...

somethingcorporate

With those kinds of figures I would get myself to a broker since just a small difference in % can actually be quite a large sum of money!

Just check the best buy tables - general advice is that there is a much wider (and better) selection at 75% LTV compared to 80% LTV.

LillythePink

Usually, the lower to LTV % the lower the rate that you would pay.

When we took our mortgage out, there was a .5% on the ratios - we were lucky as we had money from my parents as we were buying a place with a wing, so I think our LTV was in the region of 52% (our mortgage is £352k and is 2.49 above base so it's 2.99 and we are paying 1667 pm). Had it been us buying a "normal" house, the LTV would have been higher and we would have been paying a higher rate of interest.

Have you looked on some of the bank's websites to get an idea of the % that they are offering with the various LTVs?

That would give you an idea, but yes, get yourself along to a broker who will be able to advise you better

ag359

Thanks guys, both helpful replies. I was looking at the best buy tables, and it seems that there would be maybe 0.4-0.6% difference in rates. Given that it would probably only be an extra six months or so of saving, I suspect it will probably work out cheaper to rent for six months more and then buy with a 25% deposit, although I've only done a very rough back-of-envelope calculation, so not 100% sure on that.

ag359

Would be very grateful if somebody would cast their eye over my back-of-envelope calculation to check i'm on the right lines. I've tried to compare the cost over the next two years of (a) buying now with a 20% deposit, and (b) renting for six months more and then buying with a 25% deposit. I've assumed a purchase price of 400k, and mortgage of rates of 2.89% (25% dep) and 3.49% (20% dep), based on the current best buy tables, and net interest on my savings at 3% (which is fairly accurate - it's all earning approx 3% in ISA or approx 5% gross).

(a)
six months rent @ 1200 = 7200
mortgage interest = 0.0289 x 300k x 1.5 years = 13050
loss of interest on deposit = 0.03 x 100k x 1.5 years = 4500
Total = 24750

(b)
mortgage interest = 0.0349 x 320k x 2 years = 22336
loss of interest on deposit = 0.03 x 80k x 2 years = 4800
Total = 27126

So cheaper to wait six months... right?

(Obviously I appreciate this is very rough, and doesn't take into account other fees etc)

Any views appreciated!!

EDIT: I meant to say that I've only taken into account interest on the mortgage and not capital repayment, as I don't see the capital as an actual cost (because I'm getting something in return). I've also ignored the effect of any change in house values over the next 6 months.

getmore4less

You need to do like for like taking account of total in and out so you cannot ignore the capital and the savings.

in the second case you have to input another £20k to bring the mortgage down over 6 month.

Also make the mortgage payments the same after 6months to make them like for like.

starting point + savings + interest - mortgage - rent -> end point

starring point £80k savings
Available to save/pay morgage/rent (£1200+£20k/6) = £4533per month

Have a go and I will check it for you.

ag359

getmore4less, thanks a lot for your helpful reply, although i'm not quite sure I follow what you're getting at...

As I see it, the true cost of living is either rent or mortgage interest, so that's what I've tried to compare. I'm not sure that the capital part of mortgage repayments are really a cost, because you get an asset in return. What am I missing?

Cheers

getmore4less

Been out for a long lunch hence the delay

It about what you get for the money you have or put in.
The asset you are gettting comes from reducing debt so you have to factor in the costs of that debt as well.


Senario 1.

rent £1200pm
Savings @ 3% start £80k target £100k in 6 months need £3115pm extra saving for 6months
http://www.whatsthecost.com/savings.aspx

you now get a £300k mortgage @ 2.89% £722.50pm


Senario 2.
£320k mortgage @ 3.45% interest only is £920pm

But to be the same you need to put the same money in.
http://www.whatsthecost.com/mortgage.aspx
so do interest only and pay £4315 for 6 months which is what the rent and savng cost you in senario 1, this keeps the starting point and inputs the same.

After 6 months you will owe £299,483.03 and the mortgage will now be £861pm, so you owe just over £500 less at the 6 month point(this will be more if you can't get the full 3% for al the savings.

So now you pay senario 1 Mortgage at that £861 rate till you catch up which takes about 4 months then you are ahead from then on because of the lower rate in the full 18months you will owe £297445, about £2040 less than the higher rate mortgage por the same money input.

Your calcs had £2376 which is overstating the real savings by £336


Now how about another senario where you borrow the extra deposit on a zero % BT CC the fee is say 3% up front so you have to borrow £20600.

£300k mortgage is £722.50 so you have (£4315-£722.50) to throw at the CC over 6 months that is £21555 so you are £955 better off within 6 months.

With these numbers it is definately worth getting the lower rate debt.
Don't forget this does not include the fees which may be different for each mortgage, to factor those in you add the fee difference to the debt.

Another option to look at is getting a mortgage that you can change for little cost(<£500) this way you might be able to save a bit more as long as fees don't change too much by overpaying early on and then switching when the LTV hits the targets.

ag359

GM4L, that's really helpful, thanks for all your effort. I think I understand where your figures are coming from, but need to have a closer look when I have a calculator to hand! I think we come to broadly the same conclusion though (albeit with slightly different numbers) so that's reassuring to know...

getmore4less

It is important model the real situation otherwise you can miss/add stuff.

eg.
Counting interest on savings that don't exist.
Not counting the £20k savings in the first 6 months.

I think you will find this is very dependant on the net saving rate being so high on the £20k extra will be hard to get 3%.

When working with real numbers this could swing it in the short term, long term a lower rate is usualy always a winner because for the same input money you pay off the debt quicker.

Another angle is can you reduce the rent for 6 months now you have a purchase plan, why care about a nice place for the real goal?