Optimising My Mortgage: equity increase, switching & repayment

widj

Hi all,

I've come here for both some advice, and to start a bit of discussion really, as I don't believe I can be the only one in this position.

I night a house as a first time buyer at the very first opportunity I had with a decent (around 15 %) deposit while being able to secure an affordable mortgage (0.04% above for 2 years reverting to SRV of 3.0something above).

The trouble is that this turned out to be right at the top of the housing market bubble. During the 2 year deal period, I paid down (as planned) another 5% of the original value intended to leave me at 20% equity and in a good position to find a new deal.

The market doing what it did however, took nearly 13% off the value of my home, leaving me with less than 10% equity at the current value (assessed by Abbey 6 months ago on remortgage application).

Luckily, with the base rate dropping within my "deal" period, I managed to bank a good chunk of savings while my mortgage interest was sub 1%.

The problem I'm facing now, with my mortgage revetring to (an albeit very good) 3.5something %, I'm left vulnerable to a base rate rise, with nowhere to go in terms of securing a decent mortgage deal due to the equity lost to the market contraction.

As I see it, I have 3 options:
1)
use my savings to pay down my mortgage, which at present would leave me at just under 15% equity, still with nowhere to go on securing a better deal, and still exposed to base rate rises (but with no cash safety net)
2)
invest in my home further aiming to add more value to the property than the amoujt put in, with the aim of boosting my overall % equity, thus gaining better remortgage opportunities
3)
invest some or all of my savings in a potentially riskier endevour, like a business venture with the aim of returns that at least beat my mortgage & potentially provide more capital to pay the thing down

It's a slightly more complex scenario than most, but like I said, I can't be the only one and I'd appreciate anyone's thoughts, or some feedback from people in a similar situation.

Cheers.
Widj

Thrugelmir

Continue to pay your down your mortgage as quickly as you can reseasonably afford.

By owing less you'll mortgage will increase less when interest rates move upwards.

widj

Would it not depend on how much the rates rise?

If I can only pay down to <15% equity, I'm still exposed to the whole rate increase.
If I can increase my equity, and negotiate a better rate, I reduce my medium and long term risk

To remove exposure to, for example a 1% rate rise from 3.5 to 4.5% with a 138k mortgage on a 150k property requires just about 30k to be paid off, leaving 28% equity and the chance for a decent remortgage.

Which would be great, as it gives the chance to reduce exposure to rate rises and paydown the liability.

The trouble is, I have closer to 10K. Not enough to put me back over the [arbitrary] 15% equity at which many more mortgages become available, though leaving me exposed to 2/3rds of the rate increase.

If instead, the 10k were put into raising the value of my house, acheiving an increase in value of 12.5k (which is by no means out of the ordinary), it would push me over the 15% equity mark, giving me access to some better rate deals (not acheivable through paying down the mortgage) making me more secure in the mid to long term. (and having a nicer home!)

I think I must be perched on a bit of a flat topped pointy thing; stable at the moment, but one good shove and I'll be down. I want to get on a more secure platform, but to stretch the analogy my choices are:

- cutting the top off the pointy thing, making the flat bit bigger and more stable, but not getting me close enough to jump to any other, less pointy things
(paying down, but not quite being able to secure a remortgage)

- building a platform on top of the pointy thing, to try to bridge the gap to one of the less pointy things around
(investing in the property to boost equity and allow me to remortgage at a better rate)

- leave the pointy thing in search of magic beans to grow a beanstork with which to reach a less pointy thing
(invest in something more risky, like a business venture, with the hope that the ROI will boost my cash enough to allow me to pay down the mortgage to the point where the banks will give me a better deal)

Thrugelmir

widj wrote: »

Would it not depend on how much the rates rise?

You have no control over interest rates, but you do over what you spend. Hence my comment the less you owe the less interest you'll be charged. There's a famous quote by Albert Einstein "Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it."

If you are on an SVR of 3.5%, that's not a bad interest rate in the current market taking into account your LTV. What rate do you expect to achieve by remortgaging?

widj

Best rate I found on the net yesterday was a 2 year fixed at 4.09% with Yorkshire Bank (found via money.co.uk) requiring 15% equity.

Which would equate to a bet that rates will be an average 0.6% higher over the 2 years - a fair bet.

Just needs me to hit 15% equity, one way or another.

edit: I've just done the maths.
...
Essentially, if I can hit 15% equity, oddly enough *I do have some control over the rate I pay* as I can switch to a stable rate on a fixed deal.

The trouble is that I can't currently reach the banks' totally arbitrary figure 15% equity by paying down. Given that, and working from an base average rate difference of +1% (so avg base rate of 1.5%) over the term, attaining 15% equity through increasing my home value the mortgage above would leave me an average of £115 better off than paying down and sticking with the SVR of 3% above the base rate!

Of course, were I able to pay down enough to hit 15% equity & take up the deal above, I'd be a whopping £430 better off per year than I would be by getting to 15% equity by increasing the value.

I think I need another 2k, so its either wait, save and hope the deal stays around or start looking for magic beans!

Cheers for the pointers Thrugelmir, but the bit that's complicated this for me is needing that 15% to secure a decent rate and it being just out of reach. I guess the choice remains speculate the money to try to reach 15% sooner, or wait, keep saving and hope nothing unsettles the mortgage market in the mean time:(
...

p.s.
as I'm paying the interest monthly as per the mortgage agreement (I'm currently interest only), there is no compound interest involved here...
...compound interest is where interest charges are not payed off and thus included in the debt, meaning the next interest charge is calculated on (initial debt + all previous interest charges) making the level of debt accelerate each time interest is charged to the debt.

(I've included the above for those not yet at your level Thrugelmir as I'm guessing that was just an illustrative quote, not a suggestion I'm paying compound interest on a mortgage)

Thrugelmir

widj wrote: »

p.s.
as I'm paying the interest monthly as per the mortgage agreement (I'm currently interest only), there is no compound interest involved here...

If you repay an element of capital off your balance and subsequently maintain your monthly repayments then you'll incur less interest every month following.

widj

Appologies for descending into semantics here (I'm a bit of a pedant )

That's not compound interest. Compound interest causes an accelleration in growth of an investment or debt through interest charged being added to the primary sum.

Paying down loan a loan with the money saved, has the opposite effect to compound interest on a loan, similar to compound interest on an investment, but it's still not compound interest as interest is not being paid to you for reinvestment, you are merely have more cash to pay down from having paid less interest.

That's not to say it's the best strategy (if clearing the loan is your primary focus), with returns that map the same curve as coumpond interest on an investment, but it's not compound interest according to any definition I've read.

here are some more definitions that the web has to offer:
www google com/search?q=define:compound+interest