Yet another 'remortgage email' post...

Croftys

Hi,

I wont bore you with anything other than the following:

First year of a 4 year fixed deal

4.04%

House value 161,000 according to my lender, 168,000 according to other 'experts'.

Remaining mortgage 125,310 as of today

ERC of £4999.70

Is it worth remortgaging elsewhere to secure a lower rate?

My maths is poor!

Many thanks

audigex

For the sake of argument I'll assume you have exactly 3 years left. I'll also compare to another 3 rate fixed deal, as it's the only way to directly compare, and assume you don't change your term and pay the same amount per month. Note numbers are going to be approximate. If you have longer than 3 years remaining on your fixed term, you'll gain slightly more than below.

The way I work out the cost of a move is to add the fees/costs of the move, to the interest on the mortgage over that time, and use the same time period. To me, that makes most sense, because in 3 years time you could move rates anyway. I've no idea if this is the way others do it, or whether there's a better or right way... it's just the way that makes most sense in my head.

Continue your current mortgage: £125k@4% = roughly 5k interest/year, so another 15k. It'll drop slightly in years 2 and 3, but not hugely I assume. Since I make the same assumption below, it's roughly right anyway.

3 year cost: 15k

Start a new mortgage: £130.5k@2.75% is about the best I can see (£125k + 5k ERC + 500 fees), which is around £3590/year

3 year cost: £10.7k

Obviously there are other considerations, such as whether you'd prefer to reduce your monthly payments (which will give you lower payments over the term) or whether you'd prefer to continue your current payments (which will effectively be an overpayment and will reduce your term). Both will reduce the amount you pay in the long run, but in different ways and by different amounts.

Croftys

Thats really really helpful!

So by the looks of it, assuming i have the 5k upfront to pay the ERC,
and not taking into account any other unkown administration fee might it be worth considering?

Thanks!

audigex

If you pay the ERC up front, remember that you'll presumably still have to pay that back into your savings in order to end in at least as good a position as you started.

And the fee I added was the mortgage arrangement fee, which I presume you'd have. I used a fairly moderate £500, but it could be larger.

Personally I'd switch in your shoes, continue the same monthly payment and use the difference to reduce the capital ASAP and therefore the repayment term.

If you don't put the £5k back into your savings or add it to your mortgage, remember that you could still have overpaid by a single £5k lump sum, which knocks anywhere from £2.5k + 6 months (assuming 10 years remaining), to £11k + 2years (if 30 years remaining), off your mortgage even on your current rate... so include that in your decision.

Croftys

I really appreciate your help Audigex.

I honestly couldnt have asked for it to be explained any clearer.

Thank you for taking the time.

~Paul

JimmyTheWig

Sorry, but there's a problem in audigex's post.

audigex wrote: »

The way I work out the cost of a move is to add the fees/costs of the move, to the interest on the mortgage over that time

If you mean that the way I first read it then I agree. But that's not what you have done. Maybe you have forgotten a step in your figures or maybe I have mis-understood what you mean.

Continue your current mortgage: £125k@4% = roughly 5k interest/year, so another 15k. It'll drop slightly in years 2 and 3, but not hugely I assume. Since I make the same assumption below, it's roughly right anyway.

3 year cost: 15k

Agreed.

Start a new mortgage: £130.5k@2.75% is about the best I can see (£125k + 5k ERC + 500 fees), which is around £3590/year

3 year cost: £10.7k

The ERCs and arrangement fees have been added to the total to calculate interest, but what you haven't done is "add the fees/costs of the move, to the interest on the mortgage".
You need to add £5k and £500 to that £10.7k, giving £16.2k.


So it's not worth it.

JimmyTheWig

The way I do it is...
1. Add the ERCs to the fees for switching
£5000 + £500 = £5500

2. Calculate this as a percentage of the mortgage balance
£5500 / £125310 x 100 = 4.39%

3. Divide that percentage by the number of years remaining on your fix
4.39% / 3 = 1.46%

That gives you the reduction in interest rate that you would need to make it worthwhile.
So you'd need to find a mortgage rate of
4.04% - 1.46% = 2.58%
to make it worthwhile.

audigex

JimmyTheWig wrote: »

The ERCs and arrangement fees have been added to the total to calculate interest, but what you haven't done is "add the fees/costs of the move, to the interest on the mortgage".
You need to add £5k and £500 to that £10.7k, giving £16.2k.

So it's not worth it.

You're right: I was applying the repayment of the 5k over the whole term, not the 3 years, and forgetting that after 3 years both would end up on the same rate.

If you think of it as £5k coming out of savings and having to be repaid, it makes more sense. Sorry for the confusion OP