Getting a Lower Interest Rate - how will my new monthly payments get calculated?

joujou

I'm on a tracker mortgage and I am about to go from my current %25 bracket to a 40% bracket if I pay ~ £5K.

My bank told me that they will happily apply the lower interest rate without a credit search (!) provided that I pay the setup fee (£500, which will pay for itself in a few months).

What I am unsure about is how my new monthly payments will be calculated.

Does my new monthly payment take into account the remaining period (17 years instead of 19)? this will mean a slightly lower payment.

Also does the new monthly payment get calculated based on the new remaining balance? this will also mean a slightly lower payment.

FormulaDriven

Yes and yes. You are effectively transferring to a new mortgage with a term of 17y for whatever amount you currently owe, so repayment will be recalculated on that basis, and as the interest rate is lower, the repayments will be lower than now. (Unless there is some other factor you haven't mentioned).

FormulaDriven

Although should correct something you said: a shorter term means a higher repayment amount. If the interest rate were not changing, then the reducing term and reducing debt balance each other out, so it's only the fact that you cutting the interest rate that results in lower repayments.

joujou

What does the bank use to determine my LTV? is it the original price of the property, or some sort of current valuation?

amnblog

The smart thing to do is to keep your monthly payment as it is and benefit from overpayments (assuming the product allows you to do that without penalty)

joujou

I don't follow. Isn't it better to reduce the amount of interest and increase capital repayments on every single payment by switching to a lower interest rate?

SavingSteve

That's what amnblog said.

getmore4less

What is the rate change and the size of the mortgage.

£500 are you sure this will be recovered in a few months?