Can't understand recommendation

J-J

I am considering remortgaging with Santander.


There are two 2-year fix deals which they have offered to me:


1.69% (£1,518.33 per month) with a £999 fee
1.89% (£1,551.74 per month) with no fee


Both deals revert to Santander's standard rate of 4.00% after two years.


So, the way I see it, the no-fee deal is ~£33 more expensive every month, which makes it ~£800 more expensive over the two years. After the two years the rates on either deal are the same.



I have been advised by Santander (fully advised sale with their mortgage advisor) to go for the 1.69% product, even though the fee is more than the saving over two years.


Can anybody explain to me why this is better than the no-fee option?

glosoli

What is the mortgage size and term?

J-J

£351k and 23y4m.

kingstreet

The outstanding balance at the end of the fix will be lower, the lower the rate.

You have to take into account;-

difference in interest
difference in fees
difference in outstanding balance

to get the right outcome.

J-J

Yes, I think that's what I'm missing. I think I could do with a calculator to show me how much of a difference it makes. I find it very difficult to follow on the telephone, and they only send one fully worked out recommendation so it is hard to compare.

amnblog

If you are borrowing £341,000 and paying 0.2% extra on the interest rate to save a £999 fee, that is an interest cost of close to £700 per annum.

Hence the reason for the recommendation by Santander.

The monthly payments are not a true indication of the saving on their own.

SouthLondonUser

J-J wrote: »

1.69% (£1,518.33 per month) with a £999 fee
1.89% (£1,551.74 per month) with no fee
Both deals revert to Santander's standard rate of 4.00% after two years.

Download one of the many loan amortisation spredsheets, or one of the many smartphone apps, or find one of the many calculators online. Or build your own spreadsheet, which only takes a couple of minutes. But, no matter how, you need to run the numbers for a true comparison.

After 2 years, you will have paid this much between interest and fees:

Mortgage 1: £11,462 interest + £999 fees = £12,461
Mortgage 2: £12,829 interest + 0 fees

So the recommendation is correct: Mortgage 1 will save you £368 over the course of 2 years.

What you need to understand is that the monthly payment is a combination of interest and principal. Only interest (and the fees, typically paid upfront) are real costs. Principal is not a cost because it's money you are repaying to yourself!

I am, in fact, amazed at how many people fail to understand this, and also shocked that regulators do not make a clear comparison along these lines compulsory. Calculating APR over the life of the mortgage is totally meaningless - who can predict interest rates over the next decades?

For very large amounts you should also do a comparison of what you can do with the extra cash; e.g. if one mortgage is £1,000 a month and the other is £2,000 a month, the cost comparison should bear in mind that you can save £1,000 a month in a saving account. When the difference in monthly payments is so small, it doesn't make any practical difference.