Which way is cheaper

Frantic83

Hi

This might be a really stupid question, but I can't get my head around interest and stuff.

My 5 year fixed rate is just coming to an end. We were on a 25 year mortgage so it's now at 20 years left.

We've been paying around £720 a month, plus overpaying £250 on a direct debit and adding more overpayments whenever we have spare money.

Now we're starting to think about our re-mortgage. With interest rates so much lower than 5 years ago, if we stick with the 20 years that's left on the term, our mortgage payments could drop to nearer £450. We could then overpay by another £450, keeping our monthly outgoings similar to what they are now (plus continuing adhoc overpayments as we do now).

Or, we reduce the mortgage term to 9 or 10 years, and have the actual payments shoot up to nearer £900, and not have any spare cash left to overpay with on a regular monthly basis but only overpay on an adhoc basis as we do now.

Which is cheaper in real terms, over the entire course of the mortgage, when interest is taken into account?

Thank you for any help.

F.

ShALLaX

It's most likely that both ways are the same.

If you pay £900 a month (regardless of whether half of that is an overpayment or whether the mandatory amount is £900 due to a requested reduction in term), it will clear the mortgage just as quickly and at the same total cost provided that you don't get penalised for overpaying.

I would maintain the mandatory amount at £450 and be disciplined enough to try and overpay up to a total of £900. This way, if you suddenly find yourself with a large, unexpected and unrelated bill, you can easily cut back on the overpayments and divert the money towards said bill. Whereas, if your mandatory monthly mortgage payment is £900, you can't do this without first contacting your lender.

The only thing reducing your term does is look a little bit nicer on paper (hey, only 9 years to go, not 20!) but it's essentially no different.

Frantic83

Hi

Thank you for your quick response, it was very helpful. You are right - the 9 years left bit looks so appealing! But actually, you have also hit a nail right on the head by saying we should maybe maintain the mandatory amount of £450. We are going to be trying for a baby next year, and if we keep the other £450 as an overpayment, then it's also a safety net for if we find we need the cash for bringing up the baby instead.

Thank you
F

rd07

Totally agree with ShALLaX

I had the same dilemma but have decided to keep the mortgage term at 18 years, but have applied to remortgage with First Direct as there are no limit/penalties on overpayments at all (except if you repay the mortgage in full before the fixed rate ends - if you go for a fix that is)

On the application form they specify the required monthly amount and you can also specify the optional monthly overpayment value which can be changed at any time, giving you total flexibility if your circumstances change

Frantic83

Thank you rd07 for the tip about First Direct. In the last couple of years we have been able to almost max out our overpayment amount, but get really twitchy towards the end in case we've recorded what we've done wrongly and accidentally incur the charge.

First Direct is a really good possibility now. Do they do online mortgage management with real time balances etc? We're with Natwest and it's endlessly frustrating that we can't manage it online.

ShALLaX

I was with Santander and couldn't do mine online, either; it was frustrating. However, it shouldn't be much effort to keep a spread sheet. Failing this, call them when you get close to the threshold to ask for confirmation regarding your remaining allowance.

StuC75

Both are essentially the same, however would recommend keeping the longer term so that payments are optional and can vary as times change, and avoids any problems if you wanted to put the term back at any time..

Is it better for you to just revert to SVR (rather than re-fix). also avoids any admin charges from the mortgage company for actioning any kind of change..

Frantic83

ShALLaX - yes, we will be calling them this time. Last year we didn't and actually could have paid more than we had and wished we had called.

Stu75 - Thank you for your input. Natwest's SVR is currently 4% but we can fix for another two years at something like 2.69% with no admin fee.

ShALLaX

That's a decent rate for a two year fix (currently), but you could end up being in for a shock when that rate ends if interest rates rise throughout the market, at which point it'll be too late to get a longer term fix at a decent rate.

It may be worth looking for something a bit more longer term (though almost certainly with a slightly higher interest rate than 2.69%) for peace of mind, especially if you're going to be having a child.

Frantic83

Oh ok, I hadn't thought of that. We could fix for 5 years at 3.09% which wouldn't cost us loads more I guess?

ShALLaX

Sounds like a plan.