End of fixed period and wanting to overpay

robbo231079

Hi All,

We are with HSBC currently and we've recently (June 30th) completed our two year fixed term at 4.99% on a 30 year mortgage and have moved to the standard variable of 3.94%

Our payment has gone down to £1,030 and the balance today is £209,500 on a property worth £250-260k.

We want to start overpaying heavily to be mortgage free as soon as possible and are happy to add an extra £1000 per month.

We have seen a good deal from first direct for a tracker, based on 85% LTV. Tied in for 2 years at 2.99% above base, so currently 3.49%. There isn't a booking fee, but there is a £99 arrangement fee. Importantly there is unlimited overpayment on this deal. Based on £209,500 over a shorter 20 years the payment is £1.214 per month, which is okay.

Taking into account solicitors fees that I guess would be circa £700 and the arrangement fee, am I better to just start overpaying on the HSBC mortage, or take the new product and begin overpaying on that. I thought that due to the shorter term the interest may be less, or would we just get stung with more interest beginning again as its start-loaded?

P.S. Just to add something else to consider, we're also saving for a loft conversion which I should be able to do next summer, which will help with my LTV.

Thrugelmir

Loft conversions are expensive. So the added value may not be as great as you think. How many rooms are you adding and at what cost?

May be worth overpaying your mortgage now by as much as possible. Then remortgaging next summer and reborrowing the money to have the work done.

robbo231079

It is going to be a main bedroom with en-suite, we are looking to pay around £20k. When we bought the house the previous guys had extended sideways and back, during that they begun the conversion by putting in a dormer window so it is partially started. My brother is a carpenter who works on building sites and restorations which is helpful in keeping costs down. We already have more than half saved so thats not too much of an issue, I was just unsure about the mortgage side of things really and which way to go.

I just thought that as we have 28 years to go, they might be applying more interest than they would if we were on a 20 year.

Thrugelmir

robbo231079 wrote: »

I just thought that as we have 28 years to go, they might be applying more interest than they would if we were on a 20 year.

Correct. On current balance at 3.94% ( i.e, this rate for remainder of term).

28 years - £137,000 in interest payments.

20 years - £94,000 in interest payments.


So a reasonable saving in shortening the term. As interest rates may well rise in the longer term.

blueberrypie

robbo231079 wrote: »

I thought that due to the shorter term the interest may be less, or would we just get stung with more interest beginning again as its start-loaded?

robbo231079 wrote: »

I just thought that as we have 28 years to go, they might be applying more interest than they would if we were on a 20 year.

Forgive me if I'm wrong, but it seems that you have the idea that interest on a mortgage is "front-loaded". This is not the case. You pay interest on whatever you owe. Therefore at the beginning of a mortgage, when you haven't yet made any inroads into the owed amount, you are charged more interest.

Although you will pay less interest over the term of a 20-year mortgage than over a 28-year term, the reason for this is simply that a shorter term = higher monthly payments = a slightly lower balance each month = less interest charged on the balance the following month. It's the higher payment that *makes* the term shorter.

As you are now out of the fixed period with your HSBC mortgage, you are free to overpay as much as you want on that - so in terms of overpaying, there's no difference between the HSBC and First Direct mortgages you're comparing.

The FD is a tracker, so it's going to rise along with interest rates, as will the SVR on the HSBC mortgage (although it won't necessarily match the rises exactly).

So really, the question you are asking is whether the costs of switching to the FD mortgage are outweighed by the interest savings over the rest of your mortgage. Assuming you overpaid on the HSBC mortgage to bring its term down to 20 years, you'd pay around £13k more in interest than you would over 20 years on the FD mortgage, with its lower interest rate. So it would certainly outweigh the arrangement costs. However if you paid it off over a shorter period, the difference between the interest paid on the two mortgages is less - for example, over a 10-year period, the difference in interest is about £5k.

One other thing to take into consideration is whether you will actually fall into the 85% LTV bracket. What you owe right now is pretty close to that figure, and if FD value your property at even £5k less than you think, you won't qualify for an 85% LTV mortgage unless you have extra savings to pay down what you owe before taking the mortgage out.

robbo231079

Thank you, you covered pretty much everything that was in my mind there. I did indeed have the idea in my head that a mortgage is front loaded.

I'm only really interested in the very short term, i.e. the next 2-3 years. It sounds like I may only save £500 in interest over the next 2 years moving to FD, and if i incur a £99 charge, solicitors fee's and valuation fees, that saving is lost. I may as well just double pay HSBC for the next 2-3 years, do the conversion and then remortgage further down the line, with a better LTV and maybe also getting onto a fixed rate before the rates begin to rise.

One other question that I had in my head (which is maybe irrelevant now). Would a solicitor need to get involved in changing from HSBC to FD, as they are both basically HSBC. I wonder whether a land reg on a property mortgaged through FD says FD or HSBC on the charge register.

dimbo61

You would need to go through the whole remortgage process and with the new tight lending and affordability you might not be offered the mortgage and deal you want !!!!
Why not stay on the SVR and overpay by £1000 every month until your LTV is say 75% or even 60%