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SouthLondonUser

getmore4less wrote: »

If you are happy to ignore the effects of the capital particularly as the start when you are effectively borrowing different amounts that's up to you.

In the examples I made, I compared cases where the amount borrowed was the same, because the fee was paid upfront, and therefore it's a cost, no different from interest.

getmore4less wrote: »

You need to account for the interest either off the mortgage or in savings as all capital is not equal as you prefer to think.

? I'm not following.

Look, this is not about you vs me: it's about trying to help the OP with her question.

SouthLondonUser

marathonic wrote: »

Is this not what a standing order is for?

For an amount which may vary every month depending on the calculations? Plus my bank does not let me set up a standing order to overpay my mortgage every month.

getmore4less

SouthLondonUser wrote: »

In the examples I made, I compared cases where the amount borrowed was the same, because the fee was paid upfront, and therefore it's a cost, no different from interest.
?I'm not following.

for the examples the starting point is

£138k @ 1.59% £Xpm with £1k in the bank
£138k @ 1.19% (£X-£25)pm with zero in the bank

you have to account for what that £1k is doing in the first case
Is it going to start the mortgage £1k lower or are you going to save to get interest on it which you would look at if you can net more than 1.59%

your algorithm assumes save @ 0%

in case 2 you have £25pm you need to account for you can overpay or save and get some interest.
Again your algorithm assumes save @ 0%

which is fine if that's the way you want to do it, otherwise you need to have a savings running alongside the mortgage calculation as interest on the cash makes a difference to the overall cost.

Far easier to factor both into the mortgage calculation you get the worst case, not being able to find a better savings rate, which can be run through simple calculators.

for a fee no fee comparison the numbers don't vary once set up.

if planning to overpay you have to use the actual payments not the contractual to get the right answers

for this £138k it makes little difference as the numbers are on the side of pay the fee unless there is some good saving rate out there for the £1k if they have it.

For a mortgage around £130k(not done the exact crossover range) it will swing it to no fee based on the extra interest.

SouthLondonUser

First of all, I don't have any "algorithm". I simply looked at some numbers in an extremely banal spreadsheet.

Look, you are overcomplicating a really, really simple concept.

In comparing the 1.59% with no fee vs the 1.19% with a £999 upfront fee, I simply assumed (and I have said it numerous times) the fee gets paid upfront; it is therefore a cost, just like interest is. In many cases (it depends on the lender) the fee may be added to the balance, but this of course means it will cost you slightly more because you pay interest on a slightly larger balance. I have not compared this exact case because it is clearly more expensive than paying the fee upfront.

Let me make an example with something other than mortgages: if I am comparing two service providers, let's say two broadband providers, which cost £ 28 vs £ 32 per month for a 2-year contract, I simply say that one will cost £ 4 x 24 = £ 96 more over the course of the £2 years. I want to compare costs and the calculation is that one costs £ 96 more over 2 years. My understanding is that the OP was interested in the same thing: comparing costs. By all means, you can of course calculate what you would do with the extra £4 you save every month, you can calculate what return you'd get by investing £4 every month in a saving account, and calculate how much extra interest you receive over the 2 years, but this does not change the fact that one service costs £ 96 more.

getmore4less

SouthLondonUser wrote: »

First of all, I don't have any "algorithm". I simply looked at some numbers in an extremely banal spreadsheet.

that's an algorithm just missing bits

Look, you are overcomplicating a really, really simple concept.

In comparing the 1.59% with no fee vs the 1.19% with a £999 upfront fee, I simply assumed (and I have said it numerous times) the fee gets paid upfront; it is therefore a cost, just like interest is.

what about the £999 in the bank on the no fee you have to account for that some way.

In many cases (it depends on the lender) the fee may be added to the balance, but this of course means it will cost you slightly more because you pay interest on a slightly larger balance. I have not compared this exact case because it is clearly more expensive than paying the fee upfront.

Adding fees or not makes no difference if you account for them properly

Let me make an example with something other than mortgages: if I am comparing two service providers, let's say two broadband providers, which cost £ 28 vs £ 32 per month for a 2-year contract, I simply say that one will cost £ 4 x 24 = £ 96 more over the course of the £2 years. I want to compare costs and the calculation is that one costs £ 96 more over 2 years. My understanding is that the OP was interested in the same thing: comparing costs. By all means, you can of course calculate what you would do with the extra £4 you save every month, you can calculate what return you'd get by investing £4 every month in a saving account, and calculate how much extra interest you receive over the 2 years, but this does not change the fact that one service costs £ 96 more.

wrong analogy

What you need to compare is the provider that asks £95 up front for a reduction in rate rate of £4 pm for 2 year

so now you have £95 V £96 £1 difference in favor of the pay the bill up front

If you can get more than 1% net interest on the £95 you are better of paying the higher monthly fee than upfront.

lets go extreme as any method/algorithm should work for all values.
pay £575 up front or £24pm for two years(£576) which is best?

Again your way says pay up front £1 better off but with only 0.5% interest you are £2 better of paying monthly.

SouthLondonUser

I see your point now. My reservations are:

1. In some (many?) cases this kind of comparison is entirely fictional. My bank, for example, does not let me set up a standing order to overpay by a fixed amount every month, and it's not the only one. The only way to do that would be to go through the trouble of manually overpaying every month, which would be a big hassle for me; unless the savings were really substantial, I wouldn't find it worth the trouble. Not to mention the results are based on assumptions around saving rates and tax rates which no one can predict with absolute certainty.
2. In a low interest rate world like the one we currently live in, and for comparisons over short horizons like 2 or 3 years, the difference from investing a few more pounds in a saving account is unlikely to be material. And, again, it's a bit of a fiction, because it's about doing a "what-if" comparison assuming that money does get invested, but in reality one may well fritter it away in pints or else!
3. Similarly, when the difference is not material, other considerations are most likely to be the driver. E.g. one strategy is only £ 30 cheaper, but requires a substantial outlay at the beginning: well, maybe the convenience of not paying all that money in one go is worth the £30 for some. If instead paying an upfront fee results in, say, £ 1,000 less interest over 2 years, it's another story, of course.

PS Yes, even summing 2 + 2 can technically be considered an algorithm; my point was that simply running an amortisation schedule in a spreadsheet is nothing uber-complicated.

getmore4less

Every case is different, before you delve into the motivations, what is needed is a simple catch all that models something that tells you which is cheapest and by how much.

For the fee/no fee comparison you can model all the cashflow with a simple add the fees and make the payments the same, see what's left

Easy to understand(smaller is better) and catches all of the variables with reasonable assumption using the mortgage interest rate to model the cashflow timings.

if we look the
The starting point we have is £999 fee 2y fix on 22y full term
£138,000 @ 1.59% £620pm
£138,000 @ 1.19% £595pm

Although some of the differences are small they can swing the answer when close to the boundary borrowing amount, here with £999 fee 0.04% difference in rate it is around £130k.

Looking at the various models you see being used.

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The OP used the difference in payments model which is a problem as that takes no account of what is happening to the rest of the money.

This gave £999 against £25pm * 24 = £600

That makes it look like paying the fee is NOT worth it by £399

The major flaw here is that lower rate pays off more capital even with a lower payment, this is something that is non obvious unless you understand a bit about the amortization curve.
..........

The simple model, that some use as the first check, is the difference in interest against the fees on an interest only basis.

Handy thing with this one is you only need to know the amount borrowed the fees and rates in many cases this will get the yes/no to paying the fees even though the real saving will be different.

here we have £999 against £138,000 * (0.0159-0.0119) * 2 = £1104.

That make it look like the fee is worth paying by £105.

That might be a little close to be sure as the fees and repayment change the numbers towards the no fee option.

.........
couple of options next as there are 2 things not right the interest and the fee.
if you account for the fee in the above the interest becomes
((£137,001*0.004) - (£1000*0.0119))*2 = £1072

not accounting for the fee was £32 out.

or make the interest calculations more accurate for the repayment
now we have £999 against (£4,227-£3,158) = £1069

not accounting for the interest was £35 out.

do both
the new loan is £137,001 @ 1.59% £615pm interest £4197
new interest difference is £1039 total out was £65

the £105 saving has dwindled to £40

What is happening here is anything that means borrowing a bit less, ie accounting for the fees or capital repayments benefits the higher rate more than the lower rate.

That leaves the difference in payment that will benefit the lower rate.
if we take the fee reduced as the benchmark we have a £20 difference
£138,000 @ 1.19% £595pm £3158
£138,000 @ 1.19% £615pm £3153
That will improve the benefit by £5.

back up to £45 saving.

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I would suggest it is definitely worth adding the Fee adjustment to your model starting point.

That is what any sensible borrower would do if you have the money you can pay the fees or borrow less, if you don't have the fees you have to add them anyway.

which you choose does make a small difference
add the fees
£138,000 @ 1.59% £620pm interest £4,227
£138,999 @ 1.19% £599pm interest £3,181
£1046
borrow less
£137,001 @ 1.59% £615pm interest £4,197
£138,000 @ 1.19% £595pm interest £3,158
£1039

Which is the effect of £999 a 0.4% difference in rate over 2 years and just borrowing less in the first place.

One key thing with any model doing comparisons is to understand the weakness and which direction the numbers go with changes.

eg.
overpayments improve the higher rate case more than the lower rate.
Lower rate even with lower payment pays of more capital.
...

doing the £130k case.

the interest only calc comes up with
£999 V £1040 £41 better to pay the fee


repayment just paying the fee
£130,000 1.59% £584pm £3,982
£130,000 1.19% £560pm £2,975
£1,007 Fee is better by £8

borrow less
£129,001 1.59% £579pm £3,952
£977 no fee is better by £22

borrow less and overpay
£130,000 1.19% £579pm £2970
£982 no fee better by £17

add the fee
£130,999 1.19% £564pm £2,998
£983 no fee is better by £15

add the fee and overpay
£130,999 1.19% £584pm £2,993
£989 no fee better by £10

Once you have the numbers for same amount of money thrown at the mortgage you can decide if variations like take the lower payment and spend it are worth it because you now what they are costing you.

What the exercise shows, which I did it to remind myself how big the differences can be is that from a simple just do an I/O calc to a more accurate repayment model can swing the numbers £60ish for this size of debt rates and fees.
Obviously insignificant when the fee/nofee is in the multiple £100s,£1ks

Thanks for your view on this I may look at updating my model with more numbers.

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As an aside on the up front V monthly payments and utilities/other pay plans.

By calling it a discount rather than a payment plan it gets round the APR requirement of borrowing money.

Virgin Media do this with the line rental, it is £19pm or £196py a £32 discount, no mention of 28.88% APR equivalent for the monthly plan.