Remortgage: reduce LTV for lower rate, or save the money?

7sefton

Hello

I'm a bit confused and would appreciate your thoughts...

At the end of the year my fixed rate mortgage deal comes to an end. I am going to transfer to a new 2 year fix with the same lender (no fees). My options are:

Overpay £6.5K to bring my LTV below 60% and therefore get a rate of 1.54%

Or simply transfer my existing balance and get a rate of 1.59%

I can save that £6.5K in a savings account paying 1.5%, but I can't work out if I'm better doing this or overpaying to get the lower rate.

Thanks for any advice!

stevenhp1987

At those interest rates, I would overpay to bring the LTV down.

You would, effectively, be saving the £6.5k at 1.59%, which is higher than 1.5% as well as lowering the amount of interest you accrue on the mortgage. So you would save more interest than you would earn in the savings account.

If this will wipe your savings though, it might not be wise. Always good to have some spare cash lying around for emergencies.

ACG

At those rates I would go with whatever your preference is. On £100k you are talking about £35 a year and that is assuming you do not put the money in to a savings account.

getmore4less

Until you get a savings rate over 1.59% there is no calculation to do.

7sefton

Thanks all. What if I could get an average of 3% through use of regular savers etc on the £6.5K... would that make it better for me to save the cash rather than overpay?

scotgal30

3% is higher than 1.59% so......... ����

getmore4less

getmore4less wrote: »

Until you get a savings rate over 1.59% there is no calculation to do.

7sefton wrote: »

Thanks all. What if I could get an average of 3% through use of regular savers etc on the £6.5K... would that make it better for me to save the cash rather than overpay?

You missed out the critical piece of information your loan size.

This uses the standard offset calculation(with offset rate lower rather than higher)

M : mortgage debt
S : standard rate
O : offset rate

C : savings capital
N : net savings rate

Mortgage interest - savings interest == smaller mortgage interest
(M*S) - (C*N) == (M-C)*O

which simplified is

(M*S) - (C*N) == (M*O)- (C*O)

swap the sides

C(O-N) == M(O-S)

which become a simple ratio check of the mortgage saving againt the rate diferential

C/M == (O-S)/(O-N)

solving for the known numbers

M == £6.5k(1.54% -3%)/(1.54% - 1.59%)

M == £6.5k * 1.46% / 0.05%

M = £189,800

for a mortgage less than this keep the savings

7sefton

My loan size would be £176500 without the overpayment, or £170000 with it.

Can anyone help me do the maths please?

getmore4less

Updated the post with some extra explanation.

the starting point is saving or no savings/smaller mortgage at lower rate

...........................................
now we have the mortgage size

Mortgage interest - savings interest == smaller mortgage interest
(M*S) - (C*N) == (M-C)*O

(£176,500 * 0.0159) - (£6,500 * 0.03) == £170,000 * 0.0154.

£2,806.35 - £195 == £2,618
£2,611.35 < 2,618

keep the savings save money(not a lot)

you can also solve for break even interest rate
£2,806.35 - (£6,500 * N) == £2,618
N = (£2,806.35 - £2,618)/£6,500) = 0.028977 = 2.8977%