Remortgage with HSBC - Rate of Interest

Davina_Hart

Hi,

Looking for some help in understanding interest rate calculation.

I am currently going through remortgage with HSBC for our property, current valuation carried out by bank and came at £310,000. The outstanding balance on existing mortgage is £251,500. This brings loan to value to around 81%.

Looking to secure fixed rate for two years and rate of interest available is 1.39% with set-up fee of £999. The other two year fixed interest rate offer without setup fee of is 1.79%.

I am planning to take mortgage over 20 years so on the current balance of £251,500 monthly repayment will come up around £1201 per month taking into account 1.39% rate of interest or £1247 with interest rate of 1.79%. Even with setup fee 1.39% coming up cheaper by approx. £100 when calculating the payments over 2 years.

My question is on rate of interest, there is a difference of 0.39% between the two available rates so does it mean that I am saving £978.9 per year (251,500 x 0.39 / 100)?

Please let me know if my understanding and calculations are correct.

Thanks

Davina

TrickyDicky101

Your monthly repayments will repay an element of capital so the calculation is not completely as straightforward as you outline but for back-of-a-fag-packet purposes it's fine.

Surely though it is 0.40% * £251,500?

ie diff in rate is 1.79 - 1.39 = 0.4%

Davina_Hart

Yes, it my bad 0.40% is the difference


I was thinking there is not much difference over two years when you calculate the figures as below:


Outstanding balance £310,000
Rate of Interest
1.39%
Monthly payment
£1,201
Total payments over two years
£28,824
Setup Fee
£999
Total
£29,823


Rate of Interest
1.79%
Monthly payment
£1,246
Total payments over two years
£29,904
Setup Fee
£0
Total
£29,904


Difference £81


I then thought I am paying more towards the capital when interest rate is at 1.39% so I am still better off with 1.39% instead of 1.79% which may look more of less similar payment wise when comparing after two years.


Thanks


Davina

TrickyDicky101

You need to look at capital owed after two years (ie at the end of the deal).

With the fee inclusive deal, you effectively need to borrow (and base your calculations on) an initial amount £999 greater than if you go fee-free.

So assuming loan is £251,500 without fee, it would be £252,499 (251,500+999) with fee.

Then the repayments become c.£1205 per month (fee inclusive).

After 24 months, you would owe £230,202 (fee free) and £230,287 (fee-inclusive).

However, you would have paid out £29,938 (fee free) and only £28,936 (fee inclusive).

You are thus better off taking the fee-inclusive deal by

230202 - 230287 + 29938 - 28936 = £916

So, based on this, take the fee inclusive deal.

Davina_Hart

Thanks for taking time to answer my queries, appreciate your help.

I am planning to pay setup fee of £999 upfront as a one-off payment rather than adding to the capital amount and pay interest on it.

From HSBC calculator, on their website, I am seeing my outstanding balance with them after two years will be £229,382 with 1.39% rate of interest or £230,209 with 1.79% rate of interest.

The difference is £827 that I will be saving over years if I fix 1.39% rate of interest for 2 years over 1.79%.

Now if I were to look at the £999 that I paid upfront and subtract that from £827, a figure of £172 paid more.

I think fee free deal is better . What do you say?

Regards,

Davina

Davina_Hart

Thanks for taking time to answer my queries, appreciate your help.

I am planning to pay setup fee of £999 upfront as a one-off payment rather than adding to the capital amount and pay interest on it.

From HSBC calculator I am seeing my outstanding balance with them after two years will be £229,382 with 1.39% rate of interest or £230,209 with 1.79% rate of interest.

The difference is £827 that I will be saving over years if I fix 1.39% rate of interest for 2 years over 1.79%.

Now if I were to look at the £999 that I paid upfront and subtract that from £827, a figure of £172 paid more.

I think fee free deal is better . What do you say?

Regards,

Davina

TrickyDicky101

If you can afford to pay the £999 up front on the Fee Inclusive deal, then you can alternatively afford to borrow £999 LESS on the Fee Free deal (to compare like with like you fund a lower borrowing amount by utilising your £999 of available cash).

So your ultimate savings are still going to be close to the amount I quoted above - i.e. go Fee Inclusive.

There is no point just looking at what you owe after the term is up, or just at what you have paid in repayments over the 2 years - you need to look at both elements to decide what the total benefit (or cost) to you is.

Does this make sense?

DragonQ

I have a spreadsheet for this. As others said, you need to check both the remaining mortgage after two years and the amount you've paid in both interest and fees for both options. In my personal experience, mortgages with fees and lower rates win but that probably depends on lots of factors.

If you're just looking to minimise interest paid, just divide the total interest and fee payments by the total you've paid over the two years to get a "money down the drain" percentage.

P.S. If you're at 81% LTV and can afford the fee, check if you can afford to get an 80% LTV mortgage and make up the difference - this might reduce the interest rate.

Davina_Hart

I got your point. Calculation to consider capital balance left and total repayments to see which interest rate option is better. Thank you.


Davina

Davina_Hart

There is no difference in rate of interest, same rates for 80% or 85% LTV with HSBC.

getmore4less

paying up front makes no difference to the comparison calculations because on the no fee option you will be overpaying by the fee to make it the same cash position.

The simplest way is to add the fee and make the payment the same and see how much is left in 2 years using one of the simple calculators.


To get a ball park is to just look at the difference in interest and see what that is on the starting amount borrowed**.

0.004% * £25k * 2y is £2k well over the fee so pay the fee.

That is the max you can save(interest only) repayment means it will be lower but on a 20y term @ <2% it will only be a couple of £100 max


**You can guess the lower amount of the saving by taking off 2 years of payments at £1200pm, £250k becomes say £220k so around £1,800 saving.

Somewhere in the middle £1900 will be close (less the £1k fee)

but if you want to do the second calc might as well just run a calculator twice with the 4 numbers amount(with fees),rates,payment(same),term of deal.