Do banks really want us to stay in debt?

So, I have received a reminder, to start looking at renewing my mortgage deal before the current one runs out. It was a 2 year term, which is up in August, so plenty time to go get!

I'm looking through the options, and as much as I would like to overpay/shorten the mortgage, it doesn't make much financial sense!

If I reduce the years, and compare the cost of my monthly repayments, it looks like I'm better off not reducing the term, and putting the difference into a regular saver!

Then most deals I'm looking at have an early repayment charge, which again doesn't financially make sense, again when you can grow your assets quicker by keeping the debt, and putting the cash in a savings account.

The only option to me that makes remotely any sense, is reducing the size of your mortgage, each time you renegotiate the deal.

Surely the rules of the game should be, or at least the market should be pushed in the direction that its actually beneficial to reduce the size of your debt?


To put it in numbers:

My current deal is 607PCM, with 164k left once my current term is up(28 years to go).

If I reduce the term to 25 years, then I'll pay £637 a month, or £600PCM keeping at 28, with an interest rate of 1.99%.

Given regular savers pay 3-5%, I think I should stick with the 28 years.

My next thought is to reduce the outstanding balance with my savings. If I can change my mortgage when switching to 154k, then monthly payments would reduce to £562. I'm not sure how to work out IF that is better or not. I guess if I take the 600 less 562, I can save an extra 38PCM, or £456 a year. Thats a pretty decent return on 10k, 4.56% saved a year?

I'm not sure if that would be the quickest way to drive down my mortgage, certainly cant think of any better way at the moment. I really dont want to be stuck with another 28 years, 10 might be achievable!

Replies

  • miss_undastoodmiss_undastood Forumite
    226 Posts
    Part of the Furniture 100 Posts Name Dropper Combo Breaker
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    I guess it depends on any overpayment limits?

    So I have a 10 year fixed rate. I can overpay 5% of the outstanding balance per year. The early repayment penalty is 3% but at the moment I am sticking to the 5% (if I had have taken a 5 year fix I could have overpaid 10% penalty free)

    My interest rate is 3.89%. It’s not the best rate. When we took it out we thought interest rates would rise quicker than they have - but we looked at the history of base rates and 3-4% didn’t seem unreasonable.

    I think you need to understand how much you can overpay by (my first mortgage is a tracker and there are no limits on overpayments) and use that to help make an informed decision.
    Part time working mum of 2 terrors trying to build financial freedom.

    Residential Mortgages @ Oct 2020: £308,283
    @Jul 2021 £286,600
    MFW-21 #20
    MFIT-T5 #46
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