Am I missing something?

jsj25

Good morning everyone,

I've submitted a full mortgage application via my broker and all appears to be going well. I am borrowing £150,000 over a 25 year-term and the rate that my broker recommended was 1.63% over a 5-year fixed term with no arrangement fees, which gives a total to pay per month of £609.11 or £36,747 over the initial term.

I originally thought the best option would to be go for another product with the same lender - 1.45% albeit with a £995 arrangement fee. He said that although this would bring the monthly repayments down to £596.39, the cost across the 5 years would be £36,982 and therefore more expensive. So obviously I was quite happy to go with that.

However, having thought about it more, I'm conscious that the £36,982 figure assumes that I'd pay the fee up front. When I plug the numbers into a comparison site and stipulate that the cost of the fee should be added to the mortgage balance, the monthly cost comes to £600.36 and an initial term cost of £36,222 (this is the 1.45% product with the same lender). That to me looks like a no-brainer, but when I asked my broker he said that comparison sites are very misleading and said that, whilst it would be no problem to switch products, the numbers just didn't work and I'd be better off sticking with the product I've gone for.

I've got absolutely no reason not to trust what my broker is saying as he's been very helpful so far and he's said that he'll get the same commission regardless of whether I go for the higher or lower rate. He's adamant that going for the no fee product is cheaper but, based on the numbers above, I just can't see how. Is there anything I'm missing here? Are brokers able to send 'speculative' illustrations over, ie. can I ask him to send a detailed breakdown of my monthly and overall repayments just as a point of comparison?

Thanks in advance for your help!

dimbo61

Please use " whatsthecost " and put in the figures.
The rate, monthly payment, fee, amount paid over the 5 years and the outstanding balance at the end of the 5 years are important.
If you use " whatsthecost " you can find out how much you will owe at the end of the 5 years and hopefully work out what your LTV will be then 

scottishblondie

Disclaimer: I'm not a mortgage adviser.  But I can use a mortgage calculator.  So I plugged in the 3 different scenarios for you. The monthly payment/cost over the initial term isn't all you need to take into account here.  The remaining balance at the end of the 5 years is also important.  

1.63% + £0 fee
Payments over 5 years: £36,546.60
Balance after 5 years: £124,672

1.45% + £995 fee upfront
Payments over 5 years: £35,783.40 + £995 = £36,778.40
Balance after 5 years: £124,184

1.45% + £995 fee added to mortgage
Payments over 5 years: £36,021.6
Balance after 5 year: £125,007

https://www.moneysavingexpert.com/mortgages/mortgage-rate-calculator/

scottishblondie

I would also point out that by adding the £995 fee to the mortgage, you are lowering the outgoing money over the 5 year term, but you're now also going to be paying interest on that £995 for the lifetime of your mortgage.  So I wouldn't do that.

cii4ps

My broker explained, in my case, it was best for me to add it to the mortgage:
1) If for whatever reason you don't end up not getting an offer from the lender, there's no issues around getting your fee back. If it's part of the mortgage, it's something I don't have to deal with.
2) I plan to overpay significantly

If you make it part of your mortgage and don't pay it off quick, you'll accrue interest on the fee. Even if I didn't want to regularly overpay, I'd make it part of my mortgage and overpay by exactly £995 in the first month toward the principle amount. This way you:
1) Don't pay interest on it
2) Don't have to worry about the fee and the potential of a deal falling through

jsj25

scottishblondie said:

Disclaimer: I'm not a mortgage adviser.  But I can use a mortgage calculator.  So I plugged in the 3 different scenarios for you. The monthly payment/cost over the initial term isn't all you need to take into account here.  The remaining balance at the end of the 5 years is also important.  

1.63% + £0 fee
Payments over 5 years: £36,546.60
Balance after 5 years: £124,672

1.45% + £995 fee upfront
Payments over 5 years: £35,783.40 + £995 = £36,778.40
Balance after 5 years: £124,184

1.45% + £995 fee added to mortgage
Payments over 5 years: £36,021.6
Balance after 5 year: £125,007

https://www.moneysavingexpert.com/mortgages/mortgage-rate-calculator/

Ah, thank you! You're right, I wasn't factoring in the balance at the end of the 5 years, knew there was something I was missing.

Looking at those figures, the 1.63% product seems to fall in the middle when ranking the three by ITC and in the middle again when looking at remaining balance. Still struggling to decide which is best but I'm inclined to think that if there's only a couple of hundred in it either way, and if my broker's so strongly backing the no-fee product, might just be worth sticking with it! Would certainly save the headache!

tim_london

Also - check if you have allowance to make overpayments.

Many lenders requires you to add the fee to the loan.  Higher loan with lower interest generally still means the lender earns more off you over long run.  After all, you are borrowing £995 over 25 years.  

However some brokers will tell you just use the overpayment facility to pay off the £995 early so you don't lose out to this trap.  This is if the product does have overpayment facility.  

getmore4less

All those comparison are wrong they don't account for cash flow. 

Add the fees make the payment the same and see what's left after 5 years 

The interest only mortgage is the max savings £150k* 0.0018*5=£1,350
Enough to make it worth the proper calculation it will be close. If it was less than £995 no fee is better. 

Paying the fee up front is just an overpayment, if you do that you have to compare to the no fee at a lower amount borrowed. 

When adding the fee you don't pay interest for the life of the mortgage if the lower rate means it is paid off in 5 years as it will if it is the cheaper option.

After 5 years
£150.000 1.63% £610pm £124,622
£150,995 1.45% £610pm £124,406

£200 better of adding the fee to get the lower rate.

If you plan overpayment the saving will be smaller.
Do the calculation with your planned payment. 

I would be more concerned about the incompetent broker.

Ask them to document the two options properly and explain why they are recommending the more expensive option over 5 years.