Remortgaging Advice

McTaggus

Hi There! :hello:

I very much hope you kind hearted folk may be able to help! Hubby and I are on the mortgage free wannabe journey and are thinking ahead to our remortgage when our current fixed rate comes to an end.

We're currently on a 2-year fixed rate at 4.29%, on which we have been making over-payments. We're planning to re-mortgage to a lower interest rate, as we will finally have hit the goal of having a mortgage under £500K (which opens up a lot of lenders to us) and also being at below 90% LTV.

Our goal is to maximise our ability to repay our mortgage in as short a time as possible. As such, would we be better off focusing on gaining the lowest possible interest rate for a fixed period but maintaining our current payment level as per our current mortgage deal and current remaining mortgage term (i.e. our overpayment portion of our monthly payment dramatically increases), OR should we be looking for a better interest rate with a reduced mortgage term in addition to ensuring we overpay to our current payment level?

I can't quite figure out if both approaches net out differently in the short term from a fixed rate perspective, and would appreciate any thoughts or guidance anyone might be able to lend.

Thank you very much in advance, and let me know if there's any questions you have!!

Mrs McTaggus

Lilla_D

Hi, there is no one size fits all answer to this dilemma

Dependent on your income, outgoings, property details and other variables, your lender options and their deals, there will be a number of rate options to consider with their varying fees.

If you're thinking of remortgaging before the current fixed rate deal ends, you may also have an early repayment charge (penalty) to pay, which can be quite a high figure especially for a mortgage amount of over £500k.

If you know your lender options, you can check their available deals and then you can find calculators on the internet to check how much your monthly payments would come to based on different term lengths. If not sure about the lenders, you could always ask a broker as well who will be able to check your options based on the actual circumstances and give you bespoke advice.

McTaggus

Thanks very much Lilla for taking the time to respond!

We're certainly not planning on remortgaging in a timeframe to incur any ERC's from our current lender.

Looking at our current lender, we can fix for two years at 3.5%, but can get a similar fix from other lenders at closer to the 2% mark - all of which allow us 10-20% overpayments within the fix rate period of circa 2 years, with overpayments taken into account on the basis of the day that they are made.

I guess the gap in my understanding is precisely what impact reducing the term of our mortgage has. Currently, based on our overpayment projections on a 29 year remaining term mortgage, we should net out at mortgage free within 10-15 years depending on different overpayment scenarios and overpayments. But would just applying for another mortgage with a shorter term (i.e. the 15 years) be materially financially different to having a longer term mortgage and simply overpaying by a much higher sum when overpayments are taken into account on the day that they are made?

Sorry, scratching my head a little here to try to figure out the optimal approach, and not sure if the above actually lends any clarity to my original question or if the response would be the same!

McTaggus

Just adding to my own thinking having done some calculations, I don't think (please correct me if I'm wrong) that there's any material end-point difference financially between keeping an extended term and substantial overpayments (within ERC limits) and reducing my term... right? But the difference being that keeping the longer term will give me flexibility in the event my financial situation changes and I need to cut my payments back down.....? i.e. if I take a shorter term, my mandated monthly payments would increase to the same level as I currently pay with my overpayments (-14 years on my current projections). However if I keep my longer term, my mandated minimum monthly payments remain substantially lower and if I can't keep pace with my rate of overpayment I can always revert back to my minimum payment rather than potentially over-committing right now?

I would assume that stance would likely change when my mortgage value drops and 10% overpayments can no longer sustain my rate of overpayment to get me to my goals without hitting ERC's, but for now that's not an issue - I don't have 50K to spare a year to make overpayments with!!! I wish!!!

Lilla_D

Ok, so I've just done a quick calculation using £500k mortgage amount, 3.5%, 29yr term and it comes to £2289 per month.

If I changed the interest rate in the calculator to 2% while keeping the 29yr term, then the monthly payment is £1895.

If I now keep the rate 2% and change the term to 23yrs, then the payment is £2262, i.e. similar to your current payment at a reduced rate and shorter term. It could still give you the opportunity to overpay, but your overall interest payment (as projected over the term) will reduce to about half due to the lower rate and shorter term.

There are calculators out there, where you can play with these scenarios until you go crazy from all the options

Being able to pay more than your current £2289 is a good position to be in, but you may also want to consider what happens if you lose your job, unable to work due to illness and can't meet the higher payments. Do you have insurance (e.g. critical illness cover or income protection) or the employer pays sickpay for x months?

Not sure, if all the above helps or just gives you even more food for thought...

P.s. I typed the above parallel to your second message and it seems we were reading each other's mind

Thrugelmir

Factor into your thoughts that interest rates may well rise during the remaining term of your mortgage. Shortening the term too much too early may well come back to bite you. Personally I would suggest that you budget for each fixed term period as you go, i.e. 2, 5 years etc.

McTaggus

Thank you both very much for taking the time to share your thoughts, comments and great advice - it's greatly appreciated!

I think we'll take the fix when we remotgage, without shortening the term - it strikes me as the lower risk option, and completely agree on the future rate rise scenario! May indeed bite me if I shorten the term!

Thank you again! Have a wonderful weekend!

McTaggus