Short term fixed rates; pay more interest?

itchyknee

Imagine these hypothetical situations:

1) 25yr repayment mortgage one rate

2) 3yr fix on 25yr repayment mortgage followed by
2yr fix on 22yr repayment mortgage (of remaining capital)
2yr fix on 20yr repayment mortgage (of remaining capital)
etc.....

Assuming the fixed rate for 25yrs is the same as all the 2yr fixes in the second situation is the amount of interest you pay identical?
What I'm trying to ask is: Does switching your mortgage mean you pay more interest?
I'd always assumed that it didn't matter and you would pay the same, but having a chat to a work colleague he thought that because you pay more interest in the first years of a repayment mortgage (70% interest/30% capital repayment) your capital amount wouldn't decrease as much therefore when you remortgage you would have to pay more interest.

Who is correct?

kingkano

You both are. You do pay more interest in the first years. but each time you are remortgaging you arent returning back to the first years..... you are skipping them to resume where you are. So you arent paying 2yrs off then starting a new 25yr mortgage. The repayments are always calculated using the yrs that are left.

You will pay the same interest if its the same rates, but fees could skew the scales a bit

kingkano

Thats a poor explanation actually. The reason the beginning of a mortgage is 70%interest/30% capital (for an example) is because thats how much the interest is on such a big debt!! The repayment would stay the same over the long term of the loan, but as each years interest becomes less, more of your repayment is going to capital..... hopefully thats better!

dwsjarcmcd

The reason most of the 'switchers' i.e. most of us! sometimes pay more is that they don't quite do as you detail in your senario. What they often do is 2 year fix over 25 years followed by another 2 year fix but again over 25 year, rather than 23, so the debt doesn't reduce as quickly as it should

itchyknee

Thanks for the replies guys, so rephrasing the question a little more personally, I'm coming to the end of my first 2yr fix started on a 25yr repayment loan. When i come to remortgage i will have paid off a certain proportion of my initial loan and will be looking for a deal for the remaining 23 yrs. My question is if i then get another fix for the same rate as before (but this time for a 23yr mortgage), will my monthly payment be the same as they have been in the previous 2yrs?

Because I haven't paid off 2/25ths of my capital (but quite a lot less) will I be paying more interest?
I think you've already answered this but just wanted to clarify things in my head!

itchyknee

Kingkano, in your first post you mention the fact that you skip the first few years when remortgaging ie you resume where you are. This makes sense to me if the graph of interest payments versus time is linear but i don't know if it is or not. If the graph is a straight line, you can jump in at the 23yrs to go point and everything would be the same but if the graph is curved then you need to draw a new line which behaves the same as the old one but over 23yrs. I'm losing myself now but still unsure about the answer!

pamaris

Why don't UK residents opt for fixed rates longer than a few years? Why not fix the rate for 25 years while they are low? If by some snowball's chance in h-ll rates drop drastically then refinance then... surely the £££ you will save on interest and refinance fees in the long run will make up for the extra fees in the beginning.

(I am from the US...) Maybe you just can't get long term fixed rate mortgages here? I heard you could but they are not opted for.

MortgageMamma

Possibly a bit off topic but why dont you avoid the whole do I switch after two years issue by switching to a lifetime tracker capped mortgage which will never go above 5.99% and will be 0.18% above the BOE base rate? That way if rates rise you have security, if rates fall your deal falls with them. You NEVER have to remortgage off the deal, so you could save yourself a fortune in fees.

MortgageMamma

pamaris wrote: »

Why don't UK residents opt for fixed rates longer than a few years? Why not fix the rate for 25 years while they are low? If by some snowball's chance in h-ll rates drop drastically then refinance then... surely the £££ you will save on interest and refinance fees in the long run will make up for the extra fees in the beginning.

(I am from the US...) Maybe you just can't get long term fixed rate mortgages here? I heard you could but they are not opted for.

My thinking exactly, there are a few long term fixed rates, but over here the shorter term fixes are more popular, mainly due to people wishing to upgrade their homes and not wanting to pay early repayment charges which can be massive (not sure about the mortgages in the US, I imagine americans wouldnt stand for such large charges)

itchyknee

Hi MortgageMamma, reason for switching rates is due to the fact that mortgage is for 635000GBP so am currently on 2yr fix of 4.45%. Your capped deal would give me a rate of 5.25+0.18 almost 1% point more and likely to rise by another 25 base points next month which would be ~500GBP more a month than I'm paying now. So for a switch costing a thousand or so it's worth doing. With a mortgage of this size it's all about the rate and forget the rest! Realise that rates have gone up but can still get a 2yr fix for 4.79% again saving a lot on your deal.

Never really thought capped rates were worth a second look, even for people in different circumstances, the cap is always set so high that it almost never comes into play and the rates can be bettered elsewhere with other deals.

MarkyMarkD

The US banks simply don't charge the same penalties on long-term fixed rates, because they are subsidised to offer them and don't get stuck with the interest rate risk.

Although Gordo (him who won't get re-elected as PM ) would love everyone to have 25 year fixes, as he isn't going to do anything to subsidise it there's no chance of any significant proportion of people buying them as they are simply way too inflexible.