Adding fees - am I being thick?

ed67812

Spoke to a lender on the phone today.
I am looking to borrow £188k on a tracker.

There are two options for me
-2 year tracker at 1.94%, fee free.
-2 year tracker at 1.54% with £999 fee.

(These rates reduce 0.25% in Sept when base rate fall filters through).

I was surprised when the adviser told me that the fee free deal was better value over the two years. I just cannot see how that could be the case and the figures that I have come up with are

Fee Free
£706. 79 per month
£16969 over the two years
£178,153 balance remaining after 2 years.

Fee £999
£670.15 per month
£16082 over the two years
£17081 over the two years with the fee paid upfront.
£177,552 balance remaining after 2 years

Therefore, the fee based mortgage is £112 more expensive over the 2 years, but the remaining balance is £601 less after the 2 years. Therefore the fee based mortgage is much better value.


The adviser, who entirely got my point of view, explained that he understood where I was coming from, but the calculation that he has to use is working out the difference in the monthly cost and multiplying this by 24.

Unless I am missing something, that calculation takes no account of what the remaining balance will be, which is absolutely key in showing which is best value.

Am I missing something?

Mrs_Rachel_Trelfa

I think it's because the difference you save in your monthly amount is £36.64. This multiplied by 24 month (your 2 years that you will be on the deal for) is £879.36. So you would have paid £999 for the privilege of saving £879.36.

If you have the £999 money available, you could go fee free and then use that money to overpay straight away and save more on interest.

Although I could have misunderstood myself and I'm sure someone will correct me.

pjread

I've not checked your calculations but yes it sounds like you are right and he was just looking at monthly outgoings. I'd go with the option you appear to be well aware is better.

I guess he'd tell you overpaying a mortgage costs you money, on the same logic (because you have less in your pocket...)

Kynthia

Interest and fees don't reduce your capital outstanding. So my instinct would be to compare the extra interest charged with the fee and see which is less over 2 years. There's no point paying more in interest and fees as it's wasted money. You can always make overpayments if you want a lower outstanding balance.

amnblog

The difference in rate is 0.4% which means £752 per year less interest.

Therefore the maths show that interest saved will be close to £1,500 over the two years. You pay £999 for the fee to save £1,500.

I say close to £1,500 as there is some minor variation as capital is paid over the first two years and a further interest impact if the fee is added.

Whichever way you cook it, your adviser is correct.

ed67812

amnblog wrote: »

The difference in rate is 0.4% which means £752 per year less interest.

Therefore the maths show that interest saved will be close to £1,500 over the two years. You pay £999 for the fee to save £1,500.

I say close to £1,500 as there is some minor variation as capital is paid over the first two years and a further interest impact if the fee is added.

Whichever way you cook it, your adviser is correct.

Those are the exact rough calculations that I did before using an online tool to get the figures above....I'm confused by your last line though. How is the adviser correct telling me that the fee free one is better?

amnblog

Misread that.


The adviser is wrong.


The fee payment product seems to offer better VFM.


(assuming the only differences are the initial ate and the fee)

amnblog

This is TSB right?


Ask the Adviser for the total to pay figures over the full 29 years and compare the two products. You should find that the product with the fee leaves you about £850 better off.


Or, you could push the boat out, consult a broker, and pick one of the three or so products from other lenders that are priced lower that the ones we are talking about.

blueste

This has got me thinking, I am switching to a 2 year tracker borrowing £110500 with 16 years left on the term. Could someone smarter than me do the maths on which of the following is the cheaper option and explain why?

£999 product fee
Base rate +0.89%
£639.73pm

No product fee
Base rate +1.24%
£659.76pm

Both the above monthly re-payments are based on a base rate of .50. When my deal starts in September it will obviously be .25

amnblog

blueste wrote: »

This has got me thinking, I am switching to a 2 year tracker borrowing £110500 with 16 years left on the term. Could someone smarter than me do the maths on which of the following is the cheaper option and explain why?

£999 product fee
Base rate +0.89%
£639.73pm

No product fee
Base rate +1.24%
£659.76pm

Both the above monthly re-payments are based on a base rate of .50. When my deal starts in September it will obviously be .25

Difference in rate = (1.24 less 0.89% = 0.35%)


The effect of that on your £110,500 lending has to meet the cost of the fee on the lower rate, or you need to use the no fee product with the higher rate.


One year's interest saving


0.35% X £110,500 = £387

Two year's interest saving

2 X £387 = £774 v £999 fee

AnotherJoe

Back of fag packet calculation.
Difference is 0.35%.
110500 X 0.35% X 2 = £773 which is how much more you'll pay on the higher rate.

It will be a bit less than that as the principle will drop slightly each year. And since 773 is less than 999 you should go for the higher rate with no fee.