Remortgage Calculation Question

Garethuk

Hi All

Background:
I was a first time buyer and am currently on a 5 year fixed mortgage with an interest rate of 4.29%, I am at year 2 with 3 years remaining, at which point it will switch to 4.95 variable. To get out of this mortgage it would cost me £12,000, given that my fixed period is still in-going for 3 years. Currently my repayments are £1,842 - This was based on a 25 Year mortgage.
Originally i borrowed £337,500 and currently owe £320,825 2 years later.

Today i have spent some time looking at the mortgage comparison sites and am baffled by POTENTIALLY how much i could save, and therefore would really appreciate if someone could confirm my theory below is correct, or if i am missing a trick here.

For the mortgage comparison site i used the following values

To Borrow £332,825 (which is what I owe today (£320,825), plus £12,000 fee to get out of mortgage and over a 23 year period (so i'm reducing the years originally from 25 to 23 to take into account that i have had a mortgage for 2 years and so that i would still be at the same age when expecting to finish the mortgage)

The outputs were (based on a 1.89% variable rate) £1,484.15 per month.

No am i being daft or can i really knock £357.86 off and be better of by that amount? -
Am i missing a trick here with the £12,000 i have to pay the mortgage company as i did include this on top of what i currently owe, and would be borrowing, yet I am still this amount better off. I have also reduced the term to 23 years (and not put it back up to 25 years).

if i did the same comparison based on a new 5 year fixed, then i would appear to still be better off as the the 5 year fixed term offered is 2.2% and would save me £301.71 a month

Any advise on the above would be REALLY appreciated (and sorry if i have been far too long winded on this :-)

Thanks

SavingSteve

You're doing this wrong.

Work out how much interest would cost you for the three years remaining.

Work out the new product's interest (on the 12k higher balance) for three years. To that amount add the new product fee, valuation fee, legal fee and the 12k redemption charge.

Compare the two numbers to work out which route is better for you.

Just looking at the monthly payments the way you are you could end up paying thousands and thousands of pounds more.

Garethuk

Ah see this is where i knew i must be wrong, but to be honest i'm not sure what you mean and completely confused on how to make those calculations :-\

Borrowed 337,500 after two years at 4.29% . i owe £320,825 and i pay £1,842.00 a month with a further 3 years fixed to go with a £12,000 get out payment.

Not sure where to begin working it out or by what you mean around the higher balance etc.

Let me make some calculations and see if i get this right

AnotherJoe

As Steve said, you are doing it wrong.

If you dont change, you will pay 4.29% interest on £320,825, for the next 3 years.

If you do change, you will pay 1.89% interest on (£320,825 plus £12,000 plus any fees) for the next 3 years. Lets say thats £1,000 in fees so thats £333,825 @1.89%

As its a repayment mortgage you will also be paying back some of that £320,825 etc but that will only affect the calculation slightly so I'll omit it as in both scenarios you pay back some of the principal.

So, no change you pay just in interest £13,763 x 3 = £41,289
If you change you pay £6,309 x 3 = £18,927
Difference £22,362 !!

So, you should change.

As a double check, the difference in interest rates is 2.4%
2.4% x £320,825 = £7,700 x 3 = £23,100 saved but you have to subtract 1.89% of £13,000 x 3 (thats the extra ERC you ahev to pay) =£735 = £22,365 savings. Same as above near enough and I've done some rounding

Now, to be fair, you are now paying an extra chunk of interest over the next 20 years on that £13,000 extra, which is about £4,900 calculated @ 1.89% So really that should come off the total saved, but you are still up. You could also look at overpaying to reduce that.

Hopefully my maths is correct and others will confirm it or point out some glaring error.

SavingSteve

You need to knock of the 12k redemption fee and the 1k product fee from the savings

getmore4less

Do a proper like for like having the same cash come out of your pocket

Add the fees make the payments the same and just see what's left.
( you can look at optimizing by saving at higher rates once the basic calc is done)

What's left is important to the calculations as you pay a lot more capital off on a lower rate than a higher one , one person last week already got it wrong by not checking what's left.

Your current mortgage is
£320,825 3years at 4.29% paying £1842pm in 3 years £294,173.

add ERC 12k

£332,825 3years @ 1.89% paying £1842pm after 3 years £284,053

Savings before fees £10,120 (as long as rates don't go up)

fees will reduce this by more than the fee eg. £1k fee
£333,825 3years @ 1.89% paying £1842pm after 3 years £285,111

saving with £1k fees £9062

getmore4less

Anotherjoe do you really want someone to pick through your post?

the two key flaws.

As its a repayment mortgage you will also be paying back some of that £320,825 etc but that will only affect the calculation slightly so I'll omit it as in both scenarios you pay back some of the principal.

what's left is critical to the calculations as I said above the lower rate pays off a lot more capital than the higher rate each month.


Now, to be fair, you are now paying an extra chunk of interest over the next 20 years on that £13,000 extra

That 13k extra is paid off well before the 3 years are up there is no extra interest to be paid.

by switching with a £12k ERC and a £1k fee the breakeven is month 22 less than 2 years all the savings come in the 3rd year(if rates don't go up)

getmore4less

The other key point is with a repayment the interest goes down over time.

for these 2 options the actual interest over 3 years on a repayment basis paying £1842pm

£320,825 @ 4.29% £39,660
£332,825 @ 1.89% £17,589

A difference of £22071

if you just take the 13k off that you get £9071 which is one step closer to the real savings

getmore4less

Garethuk wrote: »

Ah see this is where i knew i must be wrong, but to be honest i'm not sure what you mean and completely confused on how to make those calculations :-\

Borrowed 337,500 after two years at 4.29% . i owe £320,825 and i pay £1,842.00 a month with a further 3 years fixed to go with a £12,000 get out payment.

Not sure where to begin working it out or by what you mean around the higher balance etc.

Let me make some calculations and see if i get this right

Although the maths behind how mortgages work is not basic the principles are.

Amortization is the maths to make the payment the same over the term, that's the hard bit that has been done for us, mortgage calculators are using those sums.

For a mortgage comparison what is really important is what the money from your pocket, a monthly payment or a series of them does to the amount you owe.

for a given amount of money from your pocket either paid off a mortgage or put into saving you want the net balance to be a low as possible some time in the future.

The amount of interest you pay is only part of the picture what you owe after the payment is the important number.

using that principle and any simple mortgage calculator you can work out which deal is best.

When the real* calculations are nearly as simple as using approximations based on estimates of interest payments why not just do the real calculations it can make a difference on some deals(not this one the savings are quite large).



* most amortization calculators are approximations based on equal months so even these "real" calculations have flaws.
many lenders have moves to daily interest so even their own payment calculators are estimates(close guesses) and when payments fall on a weekend the banking system throws things out by a day or two.

A mortgage has only 3 variables,
How much you owe.
The rate on that borrowing(how interest is calculated and when it gets added to the debt)
How much you are paying to the reduce the debt.

for most purposes this is simplified to once a month for both interest and payments

For all practical purposes other than determining a payment and when you have to pay off the debt full term is irrelevant to any comparison the critical information is the payment.

AnotherJoe

SavingSteve wrote: »

You need to knock of the 12k redemption fee and the 1k product fee from the savings

Doh! ,

Thanks. That's why I published my workings in case I'd made a major booboo!

Ok so OP still comes out ahead but not as much as I'd calculated.

getmore4less

The other common way to approximate is just stick the 2 mortgages on repayment basis(23y 4.29% & 1.89%) over 3 years
start..........cost per M....after 3y.......capital.......interest
£320,825...£1,831.........£294,594.....£26,231... £39,685
£333,825...£1,492 ........£298,065.....£35,760....£17,951

For the lower rate
£9529 More in capital repaid
£21,734 less interest paid
£3471 more capital still owing
£12,204 less in payments
Net savings £8733.

the interest less cost(£13k) comes out with £8734

making the overpayment(payment the same)
£333,825...£1,831 ........£285,518.....£48307....£17,609

£22,076 More in capital repaid
£22,076 less interest paid
£9076 LESS capital still owing
£0 less in payments
Net savings £9076

A interest only based calc will always over estimate the savings
The standard repayment(without overpayment) calcs will always underestimate.