Lower interest rate with fee vs. Higher interest rate with cashback

Home2011

Dear all,

In need of advice from mortgage advisors on here, regards mortgage interest rates. So our conundrum is:
Should we opt for a lower interest rate with a fee (£999) or a higher interest rate with cashback (£500)?
Asked for some quotes from mortgage advisors, and they are recommending higher interest rate with cashback, with the explanation that it is not worth paying a fee as we wouldn't get the extra money paid back over the period of fix... which sort of made sense to me.
That is until I started thinking of the overall interest paid over the term of the mortgage, which surely would be more with higher interest rates? I know it would be unlikely we'd stay with that same product until the end of term, but still it is worth considering the overall cost, is it not?

My financially savvy friend confirmed this, saying that mortgage advisor wasn't having our best interest in mind suggesting higher rate with the cashback, over the lower rate with the fee - he actually said we should report him as he was obviously favouring that product for a different reason, possibly for his own commission?!

Fails to say I am utterly confused here trying to figure out the pros and cons, so would really welcome some clarification from the people in the know.
We're looking into either a 3 or 5 year fix, thinking it is unlikely rates will get much better than currently. We also need to start moving forward with submitting the application, so need to decide soon.

Many thanks in advance

Thrugelmir

Home2011 wrote: »

That is until I started thinking of the overall interest paid over the term of the mortgage, which surely would be more with higher interest rates?

Once the fixed term expires then you will have options, stay with the existing lender (choose another product) or remortgage to a new lender. What a lender may set it's interest rates in the longer term is an unknown.

When paying product fees a longer term may well be more beneficial.

foxy-stoat

You need to crunch the numbers, work out the total you would of paid for 3 or 5 years with and without fees on both rates and compare the costs.

Home2011

Thrugelmir wrote: »

Once the fixed term expires then you will have options, stay with the existing lender (choose another product) or remortgage to a new lender. What a lender may set it's interest rates in the longer term is an unknown.

When paying product fees a longer term may well be more beneficial.

Thanks for your reply.
I understand that once fixed period ends we are free to move the product, that is not questionable. I also understand there is no guarantee as to where will their variable rate be at that point.

The question is when it comes to overall cost - is it better to chose a lower interest rate with a fee (£999) or a higher interest rate with cashback (£500)?
So I am not talking about the short term gain, which is obvious, but overall cost, i.e. is it better to pay a fee now (or add it to the mortgage) and thus pay less interest on mortgage amount overall? Or is it still better to go for fee free product regardless of the overall cost over the mortgage term.

You know what I am talking about? The real cost of the mortgage, as in total amount you will pay back? Surely that would be significantly higher with higher interest rates?

Perhaps this is obvious to everyone but me?

Confused...

[Deleted User]

Home2011 wrote: »

higher interest rate with cashback (£500)?
So I am not talking about the short term gain, which is obvious, but overall cost, i.e. is it better to pay a fee now (or add it to the mortgage) and thus pay less interest on mortgage amount overall? Or is it still better to go for fee free product regardless of the overall cost over the mortgage term.

You know what I am talking about? The real cost of the mortgage, as in total amount you will pay back? Surely that would be significantly higher with higher interest rates?

Surely that is impossible to say without figures. The higher your balance, the greater the interest paid.

Will the additional interest be more or less than the £1500 initial benefit?

Silver_Queen

It depends on whether you plan to change mortgages after your fix ends. I chose the higher interest rate with no arrangement fee and cashback on a 2 year fix, because I'm almost certain I'll change providers at the end of the 2 years rather than pay the dramatically higher interest rate once the fix ends. Working it out month by month, it was cheaper for me to have a higher interest rate with no arrangement fee and with cashback, than the lower interest rate with an arrangement fee.

Home2011

foxy-stoat wrote: »

You need to crunch the numbers, work out the total you would of paid for 3 or 5 years with and without fees on both rates and compare the costs.

Well the number crunching over the 3 or 5 years works in favour of cashback, but I am asking about overall benefit on the whole of the mortgage amount, which to me isn't that clear since it is difficult to calculate due to all fixed deals eventually reverting to variable rate.

For example if you compare say a rate of 1.79% with £500 cashback vs. 1.49% with £999 fee, fixed over 5 years.
My thinking is that even though one with cashback would be better over the 5 years, wouldn't one with lower rate be more beneficial overall, i.e.
For every £1 borrowed in the first case you will have to repay £1.79, but in the second case you will only need to repay £1.49. ., thus any saaving over the 5 years would be negated by overall higher cost?

Or am I missing something here?

[Deleted User]

Yes. You're missing the fact that the cash back and saved product fee are more than the additional interest.

Why not pay the additional £1500 off the mortgage and save even more?

Retired_Mortgage_Adviser

Your financially savvy friend appears to not know very much about how mortgage brokers are compensated by lenders.

We get something called a "procuration fee" which is (typically) around 0.3% (can vary slightly depending on the lender) of the mortgage loan amount. The proc fee does not differ based on product specifics. So irrespective of whether you take out a mortgage with no-fee or one with a fee, the proc fee is the same.

You should feel comfortable enough to ask your broker the question you have asked here. If not, I daresay he hasn't done as good a job as I would expect.

You could always get a second opinion from another broker if you feel you can't trust the one you have.

Home2011 wrote: »

My financially savvy friend confirmed this, saying that mortgage advisor wasn't having our best interest in mind suggesting higher rate with the cashback, over the lower rate with the fee - he actually said we should report him as he was obviously favouring that product for a different reason, possibly for his own commission?!

Home2011

Silver_Queen wrote: »

It depends on whether you plan to change mortgages after your fix ends. I chose the higher interest rate with no arrangement fee and cashback on a 2 year fix, because I'm almost certain I'll change providers at the end of the 2 years rather than pay the dramatically higher interest rate once the fix ends. Working it out month by month, it was cheaper for me to have a higher interest rate with no arrangement fee and with cashback, than the lower interest rate with an arrangement fee.

Thanks - that was my rationale as well to start with and after my mortgage advisor stated it. It seemed irrefutable and made sense - even though my monthly payments would be higher with higher interest rate this loss would be compensated by the cashback, so better go for that.
But then I looked at overall cost over the term of mortgage and comparison wasn't that favourable at all any more, in fact total amount repayable was significantly higher than the cashback.


WOuld be really good to hear one of mortgage advisors here shed any light on this, put us all out of our misery

foxy-stoat

Home2011 wrote: »

Well the number crunching over the 3 or 5 years works in favour of cashback, but I am asking about overall benefit on the whole of the mortgage amount, which to me isn't that clear since it is difficult to calculate due to all fixed deals eventually reverting to variable rate.

For example if you compare say a rate of 1.79% with £500 cashback vs. 1.49% with £999 fee, fixed over 5 years.
My thinking is that even though one with cashback would be better over the 5 years, wouldn't one with lower rate be more beneficial overall, i.e.
For every £1 borrowed in the first case you will have to repay £1.79, but in the second case you will only need to repay £1.49. ., thus any saaving over the 5 years would be negated by overall higher cost?

Or am I missing something here?

Hard to say as you havent told us how much the mortgage is and the monthly amounts.

Forget what happens in the 6th year as you will fix it again anyway.