Help for a first time mortgage holder

gemstars

Hi Everyone,

Forgive me if this seems a silly post but I would like to ask a few questions about what happens after the initial period of a mortgage.

I took out a 25 year mortgage 3 years ago, with an initial fixed rate period of five years. I have been overpaying 10% per year and hopefully will do so again for the next 2 years.

I understand that at the end of the five years I will either transfer to their variable rate, or take up a new deal with them or a new lender.

However, I think I might be in a position to pay off an additional chunk, is that allowed or would that be classed as going over my 10% allowance in year five and therefore incur a penalty?

Also, if my calculations are correct I will owe around 29,000 on the mortgage. As you are all experienced in getting the best deals I thought I'd ask if there would be a better way of paying this debt than continuing with the mortgage. For example getting a loan and paying the mortgage off? Is that ever done? Or are the interest rates on loans of that size usually a lot higher than interest rates on mortgages of that size.

If you need any figures/further info in order to help me please let me know.

Thank you!

JimmyTheWig

Good questions, gemstars.
The general rule is that once you go onto the Standard Variable Rate you can overpay by whatever you want with no penalty.

Your choices will be
1. Stick with the SVR.
2. Ask your lender for a new deal (in which case you should be able to make a one-off overpayment and then be back in the situation of only being allowed 10% overpayments each year).
3. Switch lenders to a new deal.
4. Pay the mortgage off in full via some other borrowing.

You are unlikely to get as good as deal by other lending than you will on your mortgage, so option 4 is basically out of the window.
With options 2 and 3 you need to consider any fees that you will be paying for this new deal. Because you will have such a low balance the fees are probably more important to you than the interest rate.

My gut feeling would be that you should go for a fee-free two year discount or fix with your current lender.
From what you've said, you should be able to clear the mortgage a couple of years after that.

gemstars

Thank you Jimmy.

This again might sound like a silly question but as I originally took out a 25 year mortgage, will I be restricted to only looking at 20 year deals when this one comes to an end? Or am I completely free to consider any deal out there?

I realise I'm making plans well in advance but I'm trying to work out whether to hold onto any spare cash I have above the 10% for the next two years so I can add it to the mortgage after my five year period, or use it for other things over the next two years.

JimmyTheWig

Another good question.
I believe that you will be free to reduce the term at renewal.
You can increase it, too, if you like.

I don't know if either of these would, or should, require a credit / affordability check, however.
Likewise with increasing the amount you are borrowing (not sounding like _you_ will want to do that, though!).

If you move to a different lender then you are free to go with anything you want, subject to their lending criteria, so I don't see why the same wouldn't be true if you stick with your current provider.

gemstars

Hi Everyone, I've dug out this thread as almost 2 years have passed since my initial inquiries above and I am now at the stage of needing to decide what to do next! Eek!


I have a 20 year mortgage with Natwest (not 25 as I previously thought!), fixed term for 5 years at 5.49% The 5 year fixed term ends in August this year.

The property was bought for £80,000, the mortgage was for £68,000 and as of today I owe just under £39,000. I have not yet used any of the 10% overpayment allowance I have this year but I do intend to use it all before August, so that will be just under £4,000 off the outstanding balance.

Additionally, I have around £10,000 in ISAs which I could use to pay of part of the mortgage once I am out of the 5 year fixed term. I can comfortably pay around £400-500 towards the mortgage per month.

So, what should I do? I have no idea where to find the information I need to work out what I should do next. I haven't had any communications from Natwest offering me anything.

This is my first time of being in this situation so I could really do with a helping hand :-)

Yorkie1

The options available to you at the time your fix comes to an end are as previously stated: go onto SVR, stay with NWest on a new product, remortgage to a new lender.

It's probably a bit soon for NWest to contact you; lead-in time is often about 3 months for lenders.

In the meantime you can play around with their calculator to see what rates and products are available at the moment. You are residential - changing deal.
http://www.natwest.com/personal/mortgages/mortgage-calculator.ashx

Don't automatically assume that a product with a lower interest rate with a high fee will be a better financial deal for you than one with a higher interest rate and no fee. The lower the amount borrowed, the less likely a fee-based product will make sense. If you're not sure how to do the maths, post some figures on here and others will help.

If the £10K in ISAs is your entire savings pot, I'd be very wary of putting that all into the mortgage - or, even, any of it to be honest.

You already have a decent amount of equity in the property so don't need to bring the LTV down, repayments on the existing amounts (£35K over 15 years) will be nowhere near your £400-500 budget, and it's wise to retain up to 6 months' expenditure in savings for a rainy day or other unexpected expenses. Beyond that, consider other savings or pension.

If you decide to stay with NatWest, you can switch online and get £100 back if you meet the criteria:
http://personal.natwest.com/personal/mortgages/manage-your-mortgage/switch-online.html

I've just taken a new product deal with Nationwide after my first fix with them came to an end. I had the option of reducing the outstanding term by a few years, to match my new monthly repayments with the amount I was paying on the higher interest of the previous fix. However, I decided not to do so.

Firstly, because it meant that I was ineligible for the online switch. And secondly (and of greater importance), it reduced my flexibility. If I ever lost my job or had to take a drop in salary for any reason, the longer term meant that the mortgage payments would be lower. I can overpay by 10% of the initial loan every year, which is more than enough.

Hopefully this is enough to get your started about what you might want to do.

gemstars

Thanks for the advice Yorkie.

I guess ultimately, what I want to do it pay back as little as possible, but then I guess that's why we're all here! :-) My current payments are £330 month which is well below what I can afford so I would like to increase them. Had I stuck with the standard payments, at the end of the mortgage I would have paid back £106,000 on a loan of £68,000. I don't like the sound of this at all!

I know what my general options are, however with this being my first mortgage, I don't really know how to work out what would be the best option for me. I'll look at the calculator you posted. I've also started looking at some comparison sites but came away confused. I'll have another go and do some more googling :-)

Yorkie1

None of us want to pay any more interest (!), but sometimes there's a bigger picture for some people's circumstances, meaning that flexibility is a good idea.

Taking your loan amount as £35K, overpayments are likely to be limited to 10% of the loan value per year (either calculated on the loan value, or recalculated on amount outstanding at the start of each calendar year). So, that's £3500 in the first year at least (call it £3600 for easy maths - i.e. £300 per month).

You could have a play around with the mortgage calculators on here, seeing what repayments you'd be making by changing certain variables such as interest rates, fees, length of mortgage and overpayments.

Here's the link to one of them; the others are on the tabs near the top of the page:
http://www.moneysavingexpert.com/mortgages/mortgage-overpayment-calculator

The reason I mention flexibility is because one way of reducing your eventual outlay / duration is to formally reduce the term of your mortgage. If you do this, your monthly payments are higher - without the flexibility to reduce them if needs be.

Alternatively, if you overpay to the same amount, then you have the same outcome but with the flexibility to stop / reduce overpayments if life requires you to. This needs to be balanced against the maximum amount of o/p's permitted.

If you change lender then you decide at the outset what term you want to apply for. If you stay with your present lender, then you either a) apply formally for the reduced term at the time of product transfer, or b) you apply for it after the mortgage has gone through, or c) you just overpay with the term remaining the same.

At b), one relevant factor is the cost the lender will charge you to make this amendment to the term - but offset against the £100 you'll have in your pocket if you do the initial switch online.