Mortgage broker - ask me anything

K_S

SuseOrm said:

If my mortgage is 6.9% and the early redemption penalty is 4% am I saving 2.9% by overpaying or have I got this wrong?  

@suseorm Depends on the specifics and timescale and you also need to factor in the opportunity cost. 

For example imagine you have 100k on your mortgage, one year left on the ERC period, the ERC is 4% and your mortgage is 7%.

You have 20k cash today and you have two options - overpay the mortgage today or keep the cash and overpay after 1 year when there is no ERC. A vanilla savings account or Cash ISA pays you 5% for cash.

Option 1 - If you overpay it today, you lose £800 (4%) ERC straight away, save £1400 (7% of 20k) in mortgage interest and lose £1000 (5% of 20k) in savings interest that you would have earned if you left it in cash for a year. Net, you're worse off about £400 (minus 2%) over the year.

Option 2 - If you leave it in cash for a year earning 5% and overpay ERC-free at the end of a year - you lose £1400 mortgage interest and gain £1000 savings interest, net worse off about £400. 

silvercar

K_S said:

SuseOrm said:

If my mortgage is 6.9% and the early redemption penalty is 4% am I saving 2.9% by overpaying or have I got this wrong?  

@suseorm Depends on the specifics and timescale and you also need to factor in the opportunity cost. 

For example imagine you have 100k on your mortgage, one year left on the ERC period, the ERC is 4% and your mortgage is 7%.

You have 20k cash today and you have two options - overpay the mortgage today or keep the cash and overpay after 1 year when there is no ERC. A vanilla savings account or Cash ISA pays you 5% for cash.

Option 1 - If you overpay it today, you lose £800 (4%) ERC straight away, save £1400 (7% of 20k) in mortgage interest and lose £1000 (5% of 20k) in savings interest that you would have earned if you left it in cash for a year. Net, you're worse off about £400 (minus 2%) over the year.

Option 2 - If you leave it in cash for a year earning 5% and overpay ERC-free at the end of a year - you lose £1400 mortgage interest and gain £1000 savings interest, net worse off about £400. 

Some double counting going on there. Cost to you

option 1 - overpay 20k today. cost = £800. Saving = £1400. Net gain £600

option 2 - earn 5% on the £20k = £1000. Pay 7% on £20k of the mortgage = £1400. Net loss= £400.

SuseOrm

Thank you @K_S

K_S

silvercar said:

K_S said:

SuseOrm said:

If my mortgage is 6.9% and the early redemption penalty is 4% am I saving 2.9% by overpaying or have I got this wrong?  

@suseorm Depends on the specifics and timescale and you also need to factor in the opportunity cost. 

For example imagine you have 100k on your mortgage, one year left on the ERC period, the ERC is 4% and your mortgage is 7%.

You have 20k cash today and you have two options - overpay the mortgage today or keep the cash and overpay after 1 year when there is no ERC. A vanilla savings account or Cash ISA pays you 5% for cash.

Option 1 - If you overpay it today, you lose £800 (4%) ERC straight away, save £1400 (7% of 20k) in mortgage interest and lose £1000 (5% of 20k) in savings interest that you would have earned if you left it in cash for a year. Net, you're worse off about £400 (minus 2%) over the year.

Option 2 - If you leave it in cash for a year earning 5% and overpay ERC-free at the end of a year - you lose £1400 mortgage interest and gain £1000 savings interest, net worse off about £400. 

Some double counting going on there. Cost to you

option 1 - overpay 20k today. cost = £800. Saving = £1400. Net gain £600

option 2 - earn 5% on the £20k = £1000. Pay 7% on £20k of the mortgage = £1400. Net loss= £400.

@silvercar Hmm, I don’t agree with how you’ve calculated option 1. If you didn’t use the 20k to overpay the mortgage (7%), it would sit in savings and you would get 5% savings interest on it. So by using that 20k to make a mortgage overpayment 7% you are foregoing the 5% interest that you could have received, the opportunity cost.

Am I missing something?

silvercar

K_S said:

silvercar said:

K_S said:

SuseOrm said:

If my mortgage is 6.9% and the early redemption penalty is 4% am I saving 2.9% by overpaying or have I got this wrong?  

@suseorm Depends on the specifics and timescale and you also need to factor in the opportunity cost. 

For example imagine you have 100k on your mortgage, one year left on the ERC period, the ERC is 4% and your mortgage is 7%.

You have 20k cash today and you have two options - overpay the mortgage today or keep the cash and overpay after 1 year when there is no ERC. A vanilla savings account or Cash ISA pays you 5% for cash.

Option 1 - If you overpay it today, you lose £800 (4%) ERC straight away, save £1400 (7% of 20k) in mortgage interest and lose £1000 (5% of 20k) in savings interest that you would have earned if you left it in cash for a year. Net, you're worse off about £400 (minus 2%) over the year.

Option 2 - If you leave it in cash for a year earning 5% and overpay ERC-free at the end of a year - you lose £1400 mortgage interest and gain £1000 savings interest, net worse off about £400. 

Some double counting going on there. Cost to you

option 1 - overpay 20k today. cost = £800. Saving = £1400. Net gain £600

option 2 - earn 5% on the £20k = £1000. Pay 7% on £20k of the mortgage = £1400. Net loss= £400.

@silvercar Hmm, I don’t agree with how you’ve calculated option 1. If you didn’t use the 20k to overpay the mortgage (7%), it would sit in savings and you would get 5% savings interest on it. So by using that 20k to make a mortgage overpayment 7% you are foregoing the 5% interest that you could have received, the opportunity cost.

Am I missing something?

I'm probably missing a coffee! But your "if you didn't use the 20k to overpay" is covered in option 2. I think you are putting in the gain on overpaying by reducing the mortgage and the gain on the interest the 20k would have got in the bank, so double counting it. Whereas I am looking at the net effect on your pocket of each option separately. 

K_S

silvercar said:

K_S said:

silvercar said:

K_S said:

SuseOrm said:

If my mortgage is 6.9% and the early redemption penalty is 4% am I saving 2.9% by overpaying or have I got this wrong?  

@suseorm Depends on the specifics and timescale and you also need to factor in the opportunity cost. 

For example imagine you have 100k on your mortgage, one year left on the ERC period, the ERC is 4% and your mortgage is 7%.

You have 20k cash today and you have two options - overpay the mortgage today or keep the cash and overpay after 1 year when there is no ERC. A vanilla savings account or Cash ISA pays you 5% for cash.

Option 1 - If you overpay it today, you lose £800 (4%) ERC straight away, save £1400 (7% of 20k) in mortgage interest and lose £1000 (5% of 20k) in savings interest that you would have earned if you left it in cash for a year. Net, you're worse off about £400 (minus 2%) over the year.

Option 2 - If you leave it in cash for a year earning 5% and overpay ERC-free at the end of a year - you lose £1400 mortgage interest and gain £1000 savings interest, net worse off about £400. 

Some double counting going on there. Cost to you

option 1 - overpay 20k today. cost = £800. Saving = £1400. Net gain £600

option 2 - earn 5% on the £20k = £1000. Pay 7% on £20k of the mortgage = £1400. Net loss= £400.

@silvercar Hmm, I don’t agree with how you’ve calculated option 1. If you didn’t use the 20k to overpay the mortgage (7%), it would sit in savings and you would get 5% savings interest on it. So by using that 20k to make a mortgage overpayment 7% you are foregoing the 5% interest that you could have received, the opportunity cost.

Am I missing something?

I'm probably missing a coffee! But your "if you didn't use the 20k to overpay" is covered in option 2. I think you are putting in the gain on overpaying by reducing the mortgage and the gain on the interest the 20k would have got in the bank, so double counting it. Whereas I am looking at the net effect on your pocket of each option separately. 

@silvercar I still think you’re ignoring the opportunity cost.

Flipping it around, if the vanilla savings rate was 7% and mortgage was at 5%, would you agree that taking cash out of savings and overpaying leaves you 2% worse off?

If so, then with a 7% mortgage and 5% savings interest, you should save only 2% by overpaying instead of saving. With 20k over one year, that would be £400, taking off the £800 ERC would leave you at minus £400.

Of course this assumes that the cash won’t simply be spent or sit in a 0% current account!

Rottieland

Any mortgage brokers have a list of lenders that will lend on a buy to let, until 85 or no age limit at the end of term?

Thank you

K_S

Rottieland said:

Any mortgage brokers have a list of lenders that will lend on a buy to let, until 85 or no age limit at the end of term?

Thank you

@rottieland Couldn't give you a 'list' without firing up my sourcing but there are PLENTY that will consider BTL term up to 85 subject to criteria, and a good few beyond that as well. Off of the top of my head I can think of - Santander goes to 85, Leeds doesn't have an upper limit afaik, etc.

On its own, a max age of 85 at end of term is very unlikely to be a limiting factor for a BTL app.

SuseOrm

K_S said:

SuseOrm said:

If my mortgage is 6.9% and the early redemption penalty is 4% am I saving 2.9% by overpaying or have I got this wrong?  

@suseorm Depends on the specifics and timescale and you also need to factor in the opportunity cost. 

For example imagine you have 100k on your mortgage, one year left on the ERC period, the ERC is 4% and your mortgage is 7%.

You have 20k cash today and you have two options - overpay the mortgage today or keep the cash and overpay after 1 year when there is no ERC. A vanilla savings account or Cash ISA pays you 5% for cash.

Option 1 - If you overpay it today, you lose £800 (4%) ERC straight away, save £1400 (7% of 20k) in mortgage interest and lose £1000 (5% of 20k) in savings interest that you would have earned if you left it in cash for a year. Net, you're worse off about £400 (minus 2%) over the year.

Option 2 - If you leave it in cash for a year earning 5% and overpay ERC-free at the end of a year - you lose £1400 mortgage interest and gain £1000 savings interest, net worse off about £400. 

This calculation seems to be heads I lose £400 tails I lose £400  
How on earth does that work when I’m overpaying them Mortgage or should I just not do that and put it all on Black? 

K_S

SuseOrm said:

K_S said:

SuseOrm said:

If my mortgage is 6.9% and the early redemption penalty is 4% am I saving 2.9% by overpaying or have I got this wrong?  

@suseorm Depends on the specifics and timescale and you also need to factor in the opportunity cost. 

For example imagine you have 100k on your mortgage, one year left on the ERC period, the ERC is 4% and your mortgage is 7%.

You have 20k cash today and you have two options - overpay the mortgage today or keep the cash and overpay after 1 year when there is no ERC. A vanilla savings account or Cash ISA pays you 5% for cash.

Option 1 - If you overpay it today, you lose £800 (4%) ERC straight away, save £1400 (7% of 20k) in mortgage interest and lose £1000 (5% of 20k) in savings interest that you would have earned if you left it in cash for a year. Net, you're worse off about £400 (minus 2%) over the year.

Option 2 - If you leave it in cash for a year earning 5% and overpay ERC-free at the end of a year - you lose £1400 mortgage interest and gain £1000 savings interest, net worse off about £400. 

This calculation seems to be heads I lose £400 tails I lose £400  
How on earth does that work when I’m overpaying them Mortgage or should I just not do that and put it all on Black? 

@susieorm The example I've given is based on the numbers I've assumed and based on the limited info in your post, they will not match your exact circumstances so don't take that as advice on what exactly you need to do.

Sorry that it wasn't much help!

If in doubt, I'd just go with the simpler calculation like what you said and ignore the opportunity cost - you overpay a 6.9% mortgage with a 4% ERC, and it will save you 2.9% in mortgage interest over the next year.

Also, overpaying the mortgage isn't just about the numbers. You've banked it, you can't turn around and spend that money frivolously and you can see the benefit every month in a reduction in your largest fixed expense - the monthly mortgage payment or the mortgage term.

All the best!