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

Home2011

Deleted_User wrote: »

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?

Thanks.
I would be grateful if you could please point me in the direction of a calculator that would show me this?
All calculations we've done point to overall interest being much grater than any cashback, and that is when the fee is factored in.

I am so confused because everyone seems to be focusing on the savings over the fixed period, but not looking at overall term... you know that figure that your key facts shows as overall cost. Surely that matters even if you are going to change your product after the fix ends, it is still illustrative of overall cost

[Deleted User]

It surely doesn't, because you won't sit on the SVR for another two decades.

And if you will, then you have much bigger problems to worry about than whether to go for cashback or not.

foxy-stoat

Home2011 wrote: »

I am so confused because everyone seems to be focusing on the savings over the fixed period, but not looking at overall term... you know that figure that your key facts shows as overall cost. Surely that matters even if you are going to change your product after the fix ends, it is still illustrative of overall cost

The overall cost is not relevant unless you are going to be on the SVR until the end, which you wont, as each lenders SVR is different and may well change at the end for the 5th year.

We are focusing on the fixed term because that is the only way to compare fixed rates.

Home2011

Retired_Mortgage_Adviser wrote: »

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.

Thanks for your reply.

I think you and my 'financially savvy friend' actually agree, since you are also suggesting that my mortgage advisor isn't up to par!
We understand about the commission and that is precisely the reason why my friend questioned advisors integrity, because they were very pushy toward this particular lender, ignoring other identical deals, as well as those with lower interest rates from other lenders. You said yourself that commission rates do vary between different lenders.

But ignoring my friends opinion, would you be able to shed some light on the original purpose of the question to what is better overall, a higher interest rate with cashback, or a lower interest rate with £999 product fee. Both on the assumption of borrowing £140000 over 15 years.

Many thanks

foxy-stoat

Seeing as you havent told us any numbers see example:

£250,000 mortgage @ 1.79% interest, monthly payment £1034.26, total paid over the 5 years = £62,055, your mortgage balance will be £208,521 on month 61 (£500 cashback)

£250,999 mortgage @ 1.49% interest, monthly payment £1002.66, total paid over the 5 years = £60,159.60, your mortgage balance will be £207,983 on month 61 (£999 fee added to mortgage)

If you take option 1 and you made 1 overpayment of £500 in month 2 say then at month 61 your mortgage balance will be £208,104.60 but you would of paid £1895.40 more over the 5 years than option 2.

So take the lower interest rate....of course if your mortgage balance is much lower then you need to crunch the numbers.

What happens in year 10, 15 or 20 isn't relevant in comparing the 2 deals.

Just seen you have your £140,000 mortgage balance.....punch the numbers into online calculators and see what the results are. Have to say though your mortgage adviser should of already done this with you so, due to new compliance and regulation.

https://www.theguardian.com/money/loan-repayment-calculator-interest-rates

Retired_Mortgage_Adviser

Well, when I said "it may vary across lenders", I'm talking about variations of a tenth of a percentage point say 0.35-0.45%. Which, for a 150k mortgage gives a range of £525-675. I can assure you that no mortgage broker with an iota of common sense would risk his job, career and ability to participate in a highly regulated sector as mortgage advice for the potential gain of £150 (which is what the lender pays, whittled down further by the mortgage club, and the proportion of the proc fee that the broker eventually gets).

Sorry to go on about this, but I hate reading accounts of people accusing brokers of deliberately wrong advice for the sake of proc fee because they don't know how the profession is regulated, what amounts are being talked about or the severity of potential consequences for mis-selling or wrong advice!

As for the original question, I can only repeat what others have said. Brokers will compare products based on their "true-cost" over the period of the fix, with the assumption that you will move on to another fix at the end of it.

If you know for sure that you will fall on to and remain on the SVR after the fix, then you would likely be best off going for a lender with the lowest SVR (though there's no guarantee that that will still be the case in 5 years!).

If you don't trust the current broker, take a second opinion from a no-commitment broker, no harm done. More likely than not, he/she will give you the same recommendation as the first.

PS: I've seen many wierd and wonderful things but in my many years of broking, not one client has asked me to compare products in the way that you describe!

Home2011 wrote: »

Thanks for your reply.

I think you and my 'financially savvy friend' actually agree, since you are also suggesting that my mortgage advisor isn't up to par!
We understand about the commission and that is precisely the reason why my friend questioned advisors integrity, because they were very pushy toward this particular lender, ignoring other identical deals, as well as those with lower interest rates from other lenders. You said yourself that commission rates do vary between different lenders.

But ignoring my friends opinion, would you be able to shed some light on the original purpose of the question to what is better overall, a higher interest rate with cashback, or a lower interest rate with £999 product fee. Both on the assumption of borrowing £140000 over 15 years.

Many thanks

getmore4less

The calculations are simple

Add the fees/cashback,
make the mortgage payment the same.

See how much is left at the end of the fix.

For your £140k mortgage
As a very rough guide each 0.1% difference in rate will cover £140 per year max.
On repayment it is a bit lower.

1.49% V 1.79% over 5 years with £1500 fee difference.
£140k*0.03*5=£2100.

Worth crunching for repayment.

Silver_Queen

Home2011 wrote: »

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

But why does the overall cost matter, if you know you're going to switch to a different mortgage after the fix?

You're not going to be paying the overall cost so it's neither here nor there.

foxy-stoat

1.79% monthly payments are £887.44 (total over 5 years £53,246.40) mortgage balance at month 61 £97,439.25 - assuming you dont overpay the mortgage with the £500 cash back.

1.49% monthly payments are £874.61 (total over 5 years £52,476.60) mortgage balance at month 61 £97,452.04 - assuming fee is added to the mortgage.

So your talking about saving £269 over 5 years by taking the lower rate.

Silver_Queen

Assuming mortgage of £140,000 over 15 years.

1. Mortgage 1: low interest (1.49%) with £999 fee.

Fees upfront: £999
Regular payment: £1,044.26
Total payment amount over 15 years: £184,745.12
Total interest: £43,746.12

Cost over 2 years: £59,434.20 + £999 fee
Cost over term: £184,745.40

2. Mortgage 2: high interest (1.79%), no arrangement fee. Not taking into account £500 cashback cos I'm bad at maths
Fees up front: £0
Regular payments: £1,047.15
Total payment amount inc fees: £184,654,42
Total interest charged: £44,654.42

Cost over 2 years: £58,995.96 + £0 fee
Cost over term: £184,653.96


So according to my calculation, you'd be better off with the lower interest one.

Take this with a pinch of salt though, cos I'm crap at maths. Maybe someone else can verify.