Does a 10 year mortgage cost the same as a 2 year fixed five times?

welshy67

For simplicity let's assume that the interest rate will stay at 5% for the next 10 years and no charges are incurred. Will a mortgage of £100,000 over 10 years cost the same overall (including interest) as taking a 2 year fixed mortgage and renewing for another 2 year fixed mortgage and so on 5 times over 10 years?

So say £100,000 at 5% over 10 years costs £25,000 in interest, will I also pay £25,000 in interest by doing the following:

£100,000 over 10 years with 2 year fixed at 5%, then
£80,000 over 8 years with 2 year fixed at 5%, then
£60,000 over 6 years with 2 year fixed at 5%, then
£40,000 over 4 years with 2 year fixed at 5%, then
£20,000 over 2 years with 2 year fixed at 5%, until £0

I always thought it should add up the same but my wife's father put the idea into her head that renewing every 2 years will cost more because we will never pay off any capital, just interest? Please advise.

roswell

It will cost more because every 2 years you need arrangement fee`s and valuers fees to be accounted for so assuming the rate stayed the same it would be cheaper over 10 years with one valuation and arrangement fee.

roswell

Interest over 10 years will be £27 000 +

welshy67

Thanks for your replies but I think you misunderstood my question. I did say that assume no charges (arrangement fees etc) because they are not relevant. I only approximated the interest amount as £25,000 for simplicity, I just want to know if one costs more in interest than the other with all factors the same?

What I mean is, will one cost more or less in interest than the other. will taking a 2 year fixed always mean far more in interest even though the amount I need to borrow will be less and the term less?

I find it a bit hard to explain what I need to know so I apologise.

Thanks.

welshy67

roswell wrote:

It will cost more because every 2 years you need arrangement fee`s and valuers fees to be accounted for so assuming the rate stayed the same it would be cheaper over 10 years with one valuation and arrangement fee.

I just read your post again, does this mean then that if we had no fees the interest would be the same which ever way I did it?

silvercar

£100,000 over 10 years with 2 year fixed at 5%, then
£80,000 over 8 years with 2 year fixed at 5%, then
£60,000 over 6 years with 2 year fixed at 5%, then
£40,000 over 4 years with 2 year fixed at 5%, then
£20,000 over 2 years with 2 year fixed at 5%, until £0

So for the first 2 years are you repaying £20,000 of capital and interest only on £80,000???
The for the next 2 years you repay £20,000 and intrest only on £60,000?

Robert_Sterling

Answering the question is easy.
Knowing what the question is is difficult.

On a 10 year mortgage at 5% the interest each year is only the same each year if there is no repayment of capital.

If you have an interest only mortgage at 5% per annum for 10 years then whether you chop it up into 10 times 1 year
5 times 2 years 2 times 5 years or as mathematicians like to say

n times 10/n years

or even 120 lots of 1 month

the total will always be 50% of the constant capital balance.

If it is a normal capital repayment mortgage then ask me again about that.

welshy67

The figures are just made up ones for simplicity and are not correct mathematically. It's my fault in that I am not asking the question correctly to get the answer I am after. I also didnt say if I was talking about an interest only or a repayment mortgage but bear in mind that this is not my field of expertise so I really don't know what I'm talking about and that's why I'm asking you guys.

It's a repayment mortgage of £92,000 over 10 years. Assume that interest rates will always be 5% for at least the next 10 years.

Scenerio 1:
Take a variable rate (pretend it will always be 5% remember) repayment mortgage of £92,000 for 10 years

Scenario 2:
Take a 10 year repayment mortgage of £92,000 with a 2 year fixed (again at 5%) and every 2 years we take another mortgage exactly the same but of course this time for 8 years, then 6, then 4 etc with a 2 year fixed (again at 5%) each time.

Assuming no arrangement fees which will cost me less if any? Does scenario 2 hold any hidden costs, perhaps in the way capital and interest is calculated or is their always a set formula? i.e. for x amount pounds over y number of years, capital and interest will always be c & i amount, where interest (c) is always higher at the earlier years.

Say Mr A had Scenario 1 and Mr B had Scenario 2, would they pay the same at the end od 10 years? Please assume 5% throughout and no fees.

Phew...I hope that makes sense

silvercar

No basic difference is the simplistic answer.

In practice there may be a slight difference based on lenders doing their calculations in different ways etc but you are paying off the same amount over the same amount of time at the same interest rate. Your second scenario means that after 2 years your capital will be slightly lower so your remotrgage amount will be less than £92k, but the steps down won't be even.
In scenario 2 your taking a repayment mortgage over 10 years (at first) with the first 2 years fixed at 5%, putting any other options in a mortgagee calculator won't give the results your looking for.

In practice, you will have arrangement fees etc every 2 years in scenario 2, though scenario 1 carries the interest rate risk.

welshy67

Thank you silvercar, that's the answer I was after.

Gorgeous_George

Yes, I agree with silvercar and the interest payments would be the same. Of course, after 2 years you will not have paid off 20% of the mortgage so the representative figures are impractical.

I would never fix for 2 years.



GG