Remortgage or not?

johnathan45

I recently tried to remortgage for a better deal with my current lender. Here is the summary of the existing deal and the deal I wanted to get:

Outstanding loan: 218500
House value: 337000
LTV: 64.84%

Existing mortgage:

Rate of interest: 2.89% ( discounted variable, repayment type)
Discount term remaining: 6 months. Will revert to SVR after that.
Overall term remaining: 23.5 years
Monthly payment: £1068.6
Early repayment charge: £1060 ( As of today).
Balance after 6 months: £215271.7

New Mortgage:

Rate of interest: 1.16% ( fixed for 2 years, repayment type)
Term: 23.5 years
Monthly payment: £885.78
Total Initial set-up fee: £1499
Balance after 6 months: £213795.1

Cost/Benefit analyis:

Cost of remortgaging: Early repayment charge + total Initial set-up fee = £2558

Benefit of remortgaging (for the next 6 months): (a)Lower monthly payments + (b)difference in outstanding loan
(a) = 6*(difference in monthly payment) = 6*(1068.6-885.78) = £1097
(b) = £215271.7 - £214488.1 = £783.6
(a)+(b) = £1880.54

Now at first, the total cost appears to be more than the total benefit by £ 678. Based on this, the mortgage advisor advised me against mortgaging.

But if I don’t do anything now, I will be remortgaging at the end of 6 months anyway and thereby incurring some cost. A detailed analysis of the fees of the best competitive deals around shows that the median set-up fee is about £1680. ( based on a sample size of 50 best deals found on this site). I argued with the advisor that considering that I’ll be spending this much anyway, I am better off if I remortgage today itself. He said that he can’t advice on what the fees will be in future and can only take the current facts into account. He also said that the bank will let me know of the best deals available with them about 2 months prior to end date.

Here are my questions:
1. Are banks known to waive off set-up fees or offer deals which are not advertised on the market to the general public at the end of the fixed term?
2. Have I missed anything major in my calculation? ( I have discounted the savings interest rate as they are negligible. Also, if I use the set-up fee as overpayment for the existing loan, I could save a bit, but it’s not much).

Regards,
John

( reposted from a different thread)

JimmyTheWig

johnathan45 wrote: »

if I don’t do anything now, I will be remortgaging at the end of 6 months anyway and thereby incurring some cost.

A good, and interesting, question.

I see your point. I see their point.
My point is somewhere in the middle.

You'd be paying the fees in 6 months time anyway, I agree. But those fees would get you a cheap interest rate for two years from then, not two years from now.
I'd look at it that you're paying £1499 to get a cheap rate for 2 years. That's 0.68% of your mortgage. It's the equivalent (roughly) of increasing the interest rate by 0.34%.

So I'd compare paying 2.89% interest for the next 6 months or paying £1060 ERCs and 1.50% interest for the next 6 months.

6 months interest @ 2.89% = £3157
6 months interest @ 1.50% = £1639
Add on the ERC and you get £2699

Which is £458 cheaper than paying the higher rate.
I'd do it.

[Are you sure that the ERCs are that low?]

johnathan45

Thanks Jimmy. That's an interesting way to look at the problem. I understand your point.

Yes, the ERC is correct. In fact it is £1056 as of today and reducing by the day. ( 1% of outstanding loan, calculated on a daily basis). I asked them if they can remortgage exactly a day before my next mortgage payment is due and they said they can't do it. Not surprised!

JimmyTheWig

johnathan45 wrote: »

Yes, the ERC is correct. In fact it is £1056 as of today and reducing by the day. ( 1% of outstanding loan, calculated on a daily basis).

You're saying that it is 1% of the balance, pro-rata according to how much of a year is left?
Have they actually confirmed the amount as I've never had a mortgage with ERCs that work like that. [Though clearly I've not had all types of mortgage, so not saying that you're wrong, just that I would double check.]

I asked them if they can remortgage exactly a day before my next mortgage payment is due and they said they can't do it. Not surprised!

I don't see why you couldn't. But it wouldn't affect that mortgage payment.
Interest will be calculated on a daily basis.
If the ERCs are worth paying to get the lower interest rate then the sooner you do this the better.

JimmyTheWig

(Incidentally, just to be pedantic, "remortgage" means to switch lenders. This is changing product within the same mortgage.)

johnathan45

JimmyTheWig wrote: »

You're saying that it is 1% of the balance, pro-rata according to how much of a year is left?
Have they actually confirmed the amount as I've never had a mortgage with ERCs that work like that. [Though clearly I've not had all types of mortgage, so not saying that you're wrong, just that I would double check.]


I don't see why you couldn't. But it wouldn't affect that mortgage payment.
Interest will be calculated on a daily basis.
If the ERCs are worth paying to get the lower interest rate then the sooner you do this the better.

Yes, I have double checked it.

Thrugelmir

Why not simply pay an additional £678 off your mortgage now.

johnathan45

JimmyTheWig wrote: »

I don't see why you couldn't. But it wouldn't affect that mortgage payment.
Interest will be calculated on a daily basis.

There are ways of getting this deal: online application where the switch-over date is controlled by me, or the phone/postal method. Their online system has been down for the past few weeks and they don't know by when this will be fixed. And for the postal method, the switch-over date is set according to the day they receive the application at their end and acknowledge. Sending the application by a registered post about a week prior to the desired date is the best I can do.

getmore4less

I think you need to break it down

Where are you are in 6 months.

Add all the fees(you need to save the cost of those for 6months)

Have you saved at least the ERC and the extra for the other fees for 6months?

That's the extra cost of changing now assuming the other fees don't change

Any more savings than that goes towards reduding the last 6 month if you had waited

then it is down to is this the best deal based on mortgage size/rate/fees.

the key dates to do a what if are
now.
6 months
2 years from now
2 years + 6 months

JimmyTheWig

johnathan45 wrote: »

Yes, I have double checked it.

Then I'd say go for it. The sooner the better, as far as I can see.

johnathan45 wrote: »

Sending the application by a registered post about a week prior to the desired date is the best I can do.

What is the benefit to you in waiting? How do the sums improve over time?

JimmyTheWig

The only thing to consider is when/if you may be moving.
Just about all mortgages are portable, but you are generally much better off if you can move without being tied into a mortgage product.

If you plan to move in, say, 3 years time the best plan might be to keep the current deal, then switch to a 2 year deal in 6 months time, then pay SVR for 6 months. This would almost definitely be better than switching now and paying SVR for 12 months.

But it's a bit of a "how long is a piece of string" question, so unless you've got plans to move it's probably best to do what's best for now and let moving happen around it.