Redeem mortgage and pay 2%? or not?

desiman

I have a £100,000 outstanding mortgage with C&G on a house which I bought in 2012 for £157,500. The mortgage is split into 2 sub-accounts (SAC)

SAC1 £30,000 0.67% (BoE+0.17%) - 9 years left
SAC2 £70,000 5.89% fixed until Feb 2015 - 22years left

SAC1 is on interest-only as its virtually interest-free from a previous mortgage I ported in. SAC2 is the extra I borrowed to top-up when I purchased this house. I overpay £50pm on SAC2 and my total monthly payment overall is ~£550

After getting my annual statement I have decided it might be worth spending 2% to redeem the (now expensive looking) SAC2 and move it on to a new 5-year fix cheaper rate. C&G are offering 3.94% (no product fee) on a up to 60% LTV so if my figures are correct, the 2% redemption fee will mean I "break even" in the first 2 years compared to interest paid leaving the subsequent 3 years to save me oodles of interest. I will also reduce the term to match my ~£550 pm payment.

(Ignoring SAC1 completely..)

IF I DO NOTHING.... After 2 years on SAC2 @ 5.89%+£50pm overpayment my debt left will be £65,420 (£524pm)

CHANGE DEAL & REDUCE TERM TO 17 YEARS..After 2 years on SAC2 @ 3.94%+£50pm overpayment my debt left will be £62,829 (£521pm)
factoring in 2% redemption = 70000*.02=£1400

I'm better off by paying £1,191 less interest just in the first two years.

Can anyone see any holes in the plan and any more advice? I'm going to see the mortgage advisor tomorrow lunchtime.

Thanks

ValHaller

• 5.89% -> 3.94% is saving 1.95%, so breakeven is just over a year
• I assume that you are saying your 2% redemption leaves a debt of 62829 after 2 years rather than 61429
• Generally not recommended here to cut the term of a mortgage - this is a contractual alteration which is difficult to undo - preferable to overpay
• Which leads on to the big issue you have - your IO mortgage runs out in 9 years and you need a plan to pay that off when the time comes - even if it is roll it into the rest of your mortgage. If you have changed your mortgage term down to 17 years, by the time you need to roll this forward, you will have just 8 years to pay off the 30000 - wherease uif you leave the mortgage term you will have 13 years.

Yorkie1

Are you sure that C&G will allow you to come out of a fixed product early and go onto another of its fixed products?

desiman

Thanks for your replies. I'm taking on board the advice of not reducing the term and just keeping with overpaying instead.

So I went to see the C&G mortgage advisor and here are my (confirmed) options

Balance outstanding on SAC2
£69,751.00 currently on 5.89% until February 2015

OPTION 1
Redeem now and move to a lower rate
Redemption fee will be 3% (£2092.53)
Move to 5 year fix @ 3.94%, 22 year term
Payment is £395 pm plus a £125 overpayment
In 5 years time I will have paid off £19,320 capital minus redemption gives me a net capital reduction of £17227.47
As this is a new product, at the end of the 5 years I will not move to the SVR but Homeowner Variable Rate currently at 3.99%

OPTION 2
Do nothing and when fix term expires will be moved to SVR
So thats 2 years of 5.89% + £50 pm overpayment and then the SVR, which is "Guaranteed to be no more than 2% above the Bank of England bank rate" so 2.5% assuming no movement
In 2 years time my balance will be £65,183.
After this a further three years on 2.5% + £181 overpayment will yield a capital reduction of £18,267.00
If BoE rate goes up to
- 1.5%, SVR is 3.5%, overpayment £171, total capital reduction of £17,294
- 2.5%, SVR is 4.5%, overpayment £136, total capital reduction of £15,395

So not really a massive difference to choose from. I'm inclined to do nothing and go for Option 2, especially since if BoE rate remains low for the long term I will be able to avail of the low SVR with a good chunk overpayment.

Thoughts?

Thrugelmir

With option 1 you are currently 1.49% worse off in 5 years time going forward.

Stick with option 2. Then your choices remain open.

Your mortgage has 22 years to run. So keep the long term in mind.