Interest calculated annually - what's the impact?

1399steve

Hi all,

First re-mortgae is looming and I'm after some advice please!

I'm looking at two different mortgages - one of which has interest calculated annually, one of which is calculated daily - I understand that interest calculated annually is worse but just wondering if there's a quick way of calculating the impact of this? I prefer the mortgage with annual interest due to lower rate and ability to make more overpayments but need to factor annual interest calculation into my decision.

Details are:

Mortgage 1
3yr fixed rate @ 4.35%
Interest calculated annually
Overpayments allowed up to 10% of outstanding balance at the beginning of any given year

Mortgage 2
3 year fixed rate @ 4.69%
Interest calculated daily
Overpayments allowed up to maximum of 20% of total repayments in any given year

As I said above I prefer mortgage 1 due to lower rate and flexibility, also if I don't hit the 80% LTV on the valuation, there's a fallback position of the same deal with 4.99% rate. Is annual interest calculation a big enough drawback to cancel out these positives?

Cheers!

anselld

Repayment or interest-only?
How much do you think you will be overpaying?
Are you happy/allowed to save up all the overpayments and do in one go just before the recalc date for Mortgage 1?

1399steve

Both repayment mortgages.

Would be intending to overpay by £350 p/m on mortgage 1 but only approx £150 p/m would be allowed on mortgage 2.

Overpayments on either mortgage may not continue for the full term but I anticipate being able to make them for at least the first year.

Don't mind about saving up overpayment for mortgage 1 to pay prior to recalcitrant - could pay monthly but if its not reducing the interest then I guess its better in my pocket than theirs!

anselld

Try this then...
http://www.mortgagesorter.co.uk/calc3.html

It would suggest that Mortgage 1 is still marginally cheeper, but only if you are careful with the timing of overpayments.

1399steve

Thanks for that. Mortgage 1 is cheaper in year 1 by circa £130 based on the figures I'm working on at the moment.

Am I right in thinking though that the saving on mortgage 1 will increase in subsequent years 2 as the outstanding balance will reduce by approx £2,400 p/a more than if I had taken mortgage 2 (assuming that I make the overpayments I'm expecting)?

anselld

I'm not sure, but the calculator would let you do the sums one year at a time, reducing the term, balance, etc each time.

1399steve

Decision made now as lender for mortgage 2 has just come back with a valuation £13k below what I bought for 3 years ago so I'm miles away from 80% LTV that I need.

Looks like the fallback position for mortgage 1 is my most likely option although given the valuation I just had, it might even be touch and go for 90% LTV