How should I tackle the mortgage?

whiskywhisky

Hi All

Advice on the following would be gratefully recieved:

- I am currently on a old Abbey (Santander) 5 year fix (5.39% ouch) which finishes this March.
- The initial mortgage amount was £112k, but with overpayments + repayments this is now around £68k. (been paying most of the 10% annual overpayment allowance).

I have around almost 7k saved that I can pay into the mortgage and the mortgage will then go to standard variable 4.24%. I have carefully planned and believe I can continue overpayments for the next few years, therefore expect to overpay and pay off the total amount in just under 5 years.

Please can someone advise what I should do now?:
- Standard variable 4.24%is high, should I apply for another mortgage now or wait a bit?
- As I believe I am able to overpay around 10%, does it matter what type (i.e. fix, discounted) mortgage I get or should I just worry about the cheapest rate and lowest charges?
- My existing mortgage was taken out for 25 years and will now be 20 years, will it work out in my favour to reduce the term and pay more? or does it not matter as I hope to pay off in 5 years anyway.
- Any advice on which mortgage deal I should apply for would be welcome.

Many thanks

Gigglepig

It sounds like you have done really well already on paying down your mortgage.
Do you have any other savings than the 7k? I am in a similar position where I have a bit of savings which I'd like to use on the mortgage, but I'm not sure how much to leave in a savings account as a "buffer".

How secure is your job, and do you expect to be able to overpay down more or less in the future?
A longer term on the mortgage - means that if your circumstances change, the minimum payment is smaller...
but, if you can only pay down 10% without penalties, then if you were to make a lot more money in the future you may be limited?
Many people like fixed interest because they want to know exactly where they stand, this may be less important to you if you are able to significantly overpay?

whiskywhisky

Giggepig - thanks.

The buffer part I did overlook and with job security, that is also a tough one nowadays. In all honesty since taking out the mortgage the main reason to quickly pay off the mortgage, as well as the savings it was also piece of mind and just incase something bad happened (i.e. I lost my job).

I also like fixed mortgages - even after making a complete balls up with my existing product and paying way too much (5.39%) for 5 years. But obviously with historically low rates I should not be unlucky again.

JimmyTheWig

whiskywhisky wrote: »

- I am currently on a old Abbey (Santander) 5 year fix (5.39% ouch) which finishes this March.

- Standard variable 4.24%is high, should I apply for another mortgage now or wait a bit?

No reason to wait as it will take two months to sort a new mortgage, probably.
Best starting point is to see what follow-on deals Santander will offer you.

- As I believe I am able to overpay around 10%, does it matter what type (i.e. fix, discounted) mortgage I get or should I just worry about the cheapest rate and lowest charges?

Not all lenders allow you to overpay by 10% each year, so check this.
The type (fix, discounted, etc) won't matter much but the most important thing for you to do is to minimise the fees you pay.
Basically, there are two places where a mortgage costs you. One is interest and the other is fees. In your case you have a relatively small loan and will be paying it off very quickly, which means you won't be paying much in interest. In which case it seems pointless to pay high fees to achieve a low interest product.
Some quick figures using http://www.moneysavingexpert.com/mortgages/mortgage-overpayment-calculator shows that you may be paying around £8k in interest over the 5 years at 4.24%. Knocking half a percent off this rate would save you around £1k in interest, so don't pay more than £1k in fees to knock half a percent off the interest rate.

- My existing mortgage was taken out for 25 years and will now be 20 years, will it work out in my favour to reduce the term and pay more? or does it not matter as I hope to pay off in 5 years anyway.

Would you want to be paying more than 10% off each year?
If so, switch to a 5 year term (the shortest available) on a repayment basis. Obviously this then commits you to high repayments which could be a bad thing if your circumstances change.

whiskywhisky

JimmytheWig - thanks, some interesting points I need to think about.

Very soon and will start when I get home from work will be to go to some of these mortgage comparison sites and ring santander and start the ball roling to change quickly.

Also will start thinking whether to go with a 5 year term. Just been playing around with that calculator link you provided, it does seem very sensible to go with 5 year if I can get a good rate and low rates.

debtdesperado

Well done on the overpayment! I agree with the above posters - I would add though that as a buffer, you should try and keep at least 6 months of living expenses (including your mortgage) as cash. You don't say what you do, but in this climate it's going to be really tough to find a new job if you lost your old one - plus there is no guarantee that your new job will be on the same sized salary. The wheels can fall off the whole thing surprisingly quickly if you commit yourself to a large mortgage payment which you then can't meet. I would stay light on your financial feet, and stick with a small mortgage payment, but with the right to overpay.

You'll pay a higher rate though for a mortgage which gives complete flexibility on the amount you can overpay - one way to get round this, and to keep your savings is to look for a mortgage with an offset facility - I recently found out that I can add this to my existing mortgage free of charge. Your savings sit in the account, and although you don't earn interest on your savings, you won't pay interest on the equivalent amount of the mortgage. At the moment I split my overpayments between the mortgage and the offset, so I'm building up some savings.

Then if the worst happens, I can use my savings, otherwise, they can just sit there until they equal the outstanding mortgage balance, and then I will pay off the mortgage.

whiskywhisky

Thanks.

Will look into what mortgages give a right to overpay more than 10%.

Willow_K

Have a look at Santanders flexible offset mortgage option. We have this product and cannot recommend it highly enough, and it is perfect for overpaying as you can effectively overpay as much as you like.

It's a tracker mortgage currently offering 2.79% above base, so 3.29% - this will be much lower than the majority of fixes and as interest rates are expected to remain low for the next couple of years at least is a very good deal (we're actually on an even better deal than this at 0.49% above base as we took this product out when interest rates were 6% - I love it when my bank tries to sell me a mortgage and I tell them they can't beat my current deal - they insist on trying and their faces are a picture when I tell them what we currently pay)

There is a savings pot you can attach to the account, so you don't pay interest on that portion of the mortgage - you can put as much into this as you want and then pay a chunk of the capital off at any time. As soon as the savings pot reaches the amount of capital, they automatically pay off the mortgage, but doing it this way means you still have access to the money should you need it.

You can also pay the capital off if you wish (not sure if there is a limit to this, but even if there is, you can continue to 'overpay' into the savings pot, so you are still reducing the interest payments.

It is a lifetime mortgage and is portable to other properties should you decide to move in the future - in our case, our deal is so good, that even if we could afford to pay our mortgage off, because we want to move to a bigger property, we would keep a nominal amount on the mortgage to secure the rate.

You can change the term of the mortgage at any time, with a phonecall, up to a maximum depending on your age. So you could initially take out the loan over 20 years, reduce to 5, but if you lost your job and needed to reduce the payments, you could up it again to 20 or even 25 years.

You have a credit limit - so in your case, the £65k you need to borrow for the mortgage. If you paid of £20k by overpaying but then found you needed the money, you could borrow it back at at the same rate, again, with just a phone call. You then have the option of increasing the minimum payment to cover the extra, or the term in order to keep the repayments the same. This means that you don't have to worry about keeping a 'buffer'.

The credit limit and savings pot also allow you to take payment holidays should you need to.

Current costs for switching are £995 (or £795 if you have a current account with them) so given the interest rate, it is worth paying the fee - especially as you would have all of the flexibility you are looking for in terms of overpayments. If interest rates did start to rise quickly, you could always look to switch to a fix as I don't think there is a penalty for moving.

JimmyTheWig

Willow_K wrote: »

Have a look at Santanders flexible offset mortgage option. We have this product and cannot recommend it highly enough, and it is perfect for overpaying as you can effectively overpay as much as you like.

Sounds good, but I bet it's for new customers only rather than existing customers coming to the end of their current deal (like the OP). Worth a look, though, OP.

Something else that's just hit me for you, OP, is that you are probably better on a variable rate than a fixed rate. I'll tell you why.
Interest rates are at an all time low right now. They can only go up. We just don't know when and by how much.
For this reason a fixed rate is going to be more expensive at the start than a variable rate. For someone like me, that is fine for our main mortgage as we need to know that we can still afford it in a few years time.
But for you, your balance is going to be reducing quickly. So if you start off with a low rate then go to a high rate it won't make much difference as your balance will be significantly lower by then.

Willow_K

JimmyTheWig wrote: »

Sounds good, but I bet it's for new customers only rather than existing customers coming to the end of their current deal (like the OP). Worth a look, though, OP.

Well the website says new and existing customers moving home or new customers transferring from another provider. They do not list any deals for existing customers whose current deals are coming to an end - you have to call them.

We got the product as an existing customer without moving when our two year tracker deal ended, although they may have changed the rules since then (2007). However, if I recall correctly we were actually offered a slightly better deal as an existing customer - I think we got reduced fees.

Desperate_Housewife_2-2

could you look at offset mortgages if you have savings? http://www.moneysupermarket.com/mortgages/ a quick look at moneysupermarket starts off at 2.88% which is great value.

Could you join one of the challenges too on here? The support from fellow payees is invaluable and definitely worked for me (see sig)
Good luck