Mortgage fixed for 5 years with fee/ no fee

atruefaker

Wondering if I can get some friendly advice please.

I’ve been offered the following 5 year fixed from Santander:

1.99% + no fee
1.79% + £999 fee

Mortgage: @ 307000

Also got the 123 account, means you get £10 cashback on your mortgage each month.

I have done some calculations and the 1.99% comes out cheaper over the 5 Years. However, ever few months I might overpay by £500-£1k.

Does overpaying now and then mean the lower rate of 1.79% + fee is actually the better option?

Thanks in advance.

getmore4less

I have done some calculations and the 1.99% comes out cheaper over the 5 Years. However, ever few months I might overpay by £500-£1k.

you might need to review your calculations

Over paying favours the higher rate a bit but not much on a £300k mortgage.

rough calculation
0.002*£307,000*5= £3070 which is a lot more than the fee so fee is better by £2069 (will be less for a repayment)

Real calcs add the fees and see how much is left in 5 years

on say 20year term about £1300pm

£307,000 @ 1.99% £1300pm £257,149
£307,999 @ 1.79% £1300pm £255,280

£1,869 better off with the fee.

even £3000pm payment the fee deal is better
£307,000 @ 1.99% £3000pm £149,996
£307,999 @ 1.79% £3000pm £148,660

£1,336 better with the fee

£5370pm ( the max for 5years )
£307,000 @ 1.99% £5370pm £610
£307,999 @ 1.79% £5370pm £18

£592 better off

atruefaker

Thanks for your post.

I used a mortgage calculator on "this is money" and the calculations are different to yours, when not incorporating overpayments. I am confused by your calculations as I have worked out a difference of £743.86 (£89,488.90 - 88,745.04), which would mean going for 1.79%+fee is more expensive compared to the 1.99% deal.

Am I missing something?

Monthly payment
Find out monthly payments and compare the cost of mortgages over the initial deal period including arrangement fees.
Amount borrowed:£307000
Arrangement fee:£0
Term: (years)21
Interest rate: (actual interest rate & not the APR) 1.99%
Initial deal period: (years / months) 5yrs
Results
Total monthly payment: £1,491.48
Total charge: £68,853.40
Total repayment:£375,853.40
Cost over deal period inc fee: £89,488.90

2nd Comparison calculator:
Amount borrowed:£307000
Arrangement fee:£999
Term: (years) 21
Interest rate: 1.79%
Initial deal period: (years / months) 5 yrs

Results
Total monthly payment: £1,462.43
Total charge: £62,532.35
Total repayment:£369,532.35
Cost over deal period inc fee: £88,745.04

getmore4less

those numbers include the fee so the low rate + fee is lower cost over 5 years

BUT usual error many make is the difference in debt at the end has not been included.


lower rate even with a lower payment pays off more debt

atruefaker

Thanks, so if I didn't have the fee to pay then I'd actually be £1742.86 better off overall (£999+ £743.86)?

I'm hoping I am getting this!

getmore4less

NO still not there ,

That calculator is useless for comparing two mortgages for the rate<->fee trade off.
(http://www.thisismoney.co.uk/money/mortgageshome/article-1633400/Mortgage-calculator-Compare-true-cost-rates-fees.html)

You need to look at how much is left on the the mortgage at 5 years that calculator only looks at monthly payment and fees.

for your 21y term and payments after 5 years
1.99% £1,491.48 £245,079
1.79% £1,462.43 £244,000

Difference in payments is £29.05 * 5* 12 = £1743 - £999 = £744 better off with the fee.

But after 5 years the debt is lower by £1079 to make the total better off after 5 years £1823 by taking the 1.79 with the £999 fee

(which is close enough to the £1,869 I got with 20y term)

amnblog

This high end maths is all very nice but basically unnecessary.

If you owe £307,000, then 0.2% difference in rate is worth close to £600 in interest cost in year one (allowing for capital reducing and interest with it).

You need to save over £999 in interest over 5 years to cover the fee.

Even if you were paying off the capital at a rapid rate like £2,000 a month for example, you would still owe £259,000 at the end of year two and therefore the interest difference is worth at least £500 in the second year.

It is difficult to see how over 5 years and 0.2% saving in rate is not worth £999.

atruefaker

Thank you to both of you for your advice.

I will secure the 1.79% with fee then.

d_seng

Yes, in my experience (1 mortgage + 3 remortgages) the math is favourable when you pay the fee upfront.

getmore4less

d_seng wrote: »

Yes, in my experience (1 mortgage + 3 remortgages) the math is favourable when you pay the fee upfront.

When comparing deals it makes a tiny difference as you are just borrowing less on both.