Remortgage - worth paying 1% ERC?

Glastoun

I just want to check my calculations, make sure I'm not missing something obvious.

We have £95000 outstanding on an 18 year mortgage, currently fixed for 1 more year at 4.5%, with a 1% ERC if we move within this year. We pay £672 per month.

It looks like I could remortgage onto a fee-free 1.79% fixed for 2 years, which then currently moves up to a 4.49% after the fix but I would switch to another deal again. Paying less per month (£640, calculated over a 14 year mortgage) we would have paid off just over £2000 more at the end of the first year, so even with the £950 ERC we would be over £1k better off in a year's time and have knocked 4 years off the mortgage term.

Is this correct, or have I made an obvious mistake like when I tried to arbitrage the odds between bookies and lost £200?


4.49% for next year - total is multiplied by monthly interest rate, then £672 is subtracted

Month 0 £95,000.00
Month 1 £94,676.35
Month 2 £94,351.51
Month 3 £94,025.47
Month 4 £93,698.25
Month 5 £93,369.82
Month 6 £93,040.19
Month 7 £92,709.35
Month 8 £92,377.30
Month 9 £92,044.03
Month 10 £91,709.53
Month 11 £91,373.82
Month 12 £91,036.87

1.79% for next year - total is multiplied by monthly interest rate, then £640 is subtracted

Month 0 £95,000.00
Month 1 £94,500.56
Month 2 £94,000.38
Month 3 £93,499.46
Month 4 £92,997.80
Month 5 £92,495.39
Month 6 £91,992.25
Month 7 £91,488.36
Month 8 £90,983.72
Month 9 £90,478.34
Month 10 £89,972.20
Month 11 £89,465.32
Month 12 £88,957.69
Add £950 ERC = £89,907.69

£91,036.87 minus £89,907.69 = £1,129.17

Thrugelmir

Is the "remortgage" with a new lender?

Glastoun

Thrugelmir wrote: »

Is the "remortgage" with a new lender?

Yes. Specifically valuation and legal fees paid for by the new lender.

Glastoun

But in principle do the calculations look correct?

Whenever I speak to a broker about saving money the only thing they seem to look at is the difference in the monthly payments, they don't seem to consider the amount of interest paid or the amount outstanding.

betmunch

Glastoun wrote: »

But in principle do the calculations look correct?

Whenever I speak to a broker about saving money the only thing they seem to look at is the difference in the monthly payments, they don't seem to consider the amount of interest paid or the amount outstanding.

Have you done a full fact find with the broker?

It seems to me that you have just had a brief conversation.

The way I would do it is show the monthly payment saving after the remortgage has completed then ask what you would do with the saving.

It looks like you have already worked out what you would do before being asked that question, you would reduce the term to save on total interest.

That's just how it looks to me, you may have given the broker the impression you wanted to save on monthly outgoings, or they may have just not considered the potential for saving on total interest paid as its not overly common these days.

Anyway, in response to the question does it look OK, if your figures are correct, I wouldn't have a problem with it

getmore4less

Your calcs are wrong.

a. you add the fees at the start
b. you don't account for the difference in payment.

Just use a simple mortgage calculator add the fees/ERC and make the payment the same look at what's left at end of year 1.

I use
http://www.whatsthecost.com/mortgage.aspx

1. £95000 18years @4.5% £643pm (why are you paying £672)

new deal

2. £95950 18years @ 1.79% £520pm

Say paying £672 on both after 1 year.(you can ignore term)

1. £91132
2. £89551

£1581 better off switching after a year.

enjoyyourshoes

Interest is charged daily, have you calculated monthly by days or /12?
There will be additional costs with taking re-mortgage, these have to be set against 'potential' savings.
Opportunity cost of the £950 ERC and additional costs (5% interest @TSB)? over the year.

amnblog

Everyone is getting exciting about the maths but the simple fact is that paying 1% to drop the rate by 2.71% (annual equivalent) simply works with regard to a saving.


Whether the suggest action, product, or rate is right for the OP is a different question.

getmore4less

amnblog wrote: »

Everyone is getting exciting about the maths but the simple fact is that paying 1% to drop the rate by 2.71% (annual equivalent) simply works with regard to a saving.


Whether the suggest action, product, or rate is right for the OP is a different question.

That's fine for when the rates are far apart(ERC/rate difference) but when closer you need to do the calcs. and other fees change things.

What the OP was asking was about the calculations.

Glastoun

Thanks for this, that's what I was looking for. And yes my calculations are wrong. We currently owe around £100k, but might put in an extra £5k in August, so the monthly repayments would drop down from the current £672.

I added the £950 at the end just as a notional extra cost - if I added it to the beginning it would accrue interest in my calculations. I know there's opportunity cost of not having that £950 but over a year it's likely to be only £30-£40 after tax in a 5% TSB account. The broker was talking about fee free mortgages, so unless there is an application fee or anything from my current lender on top of the ERC then there wouldn't be any other costs.

I hadn't found that calculator before, it was the monthly breakdown that I was trying to recreate myself, using monthly interest rates not daily.

I plugged in £100k at 4.5% over 18 years and 1.79% over 14 years, to keep the payments about the same, and after 1 year this is what remains:

4.49%: £95,989.56
1.79%: £93,123.97

So a difference of £2865.59, which is £1865.59 after the ERC.

Will take this to a broker and see what they recommend, thanks.

amnblog

getmore4less wrote: »

That's fine for when the rates are far apart(ERC/rate difference) but when closer you need to do the calcs. and other fees change things.

What the OP was asking was about the calculations.

These rates are far apart.


The calculations take care of themselves but do not necessarily provide the answer.