To take a penalty & switch ... or not?

JustAnotherSaver

So my 5yr fixed with Nationwide comes to an end September next year, 2023.

With rates looking to increase which is a first for us while we've had a mortgage, and with how fairly close we are to the end of the 5yr deal, I was wondering if some knowledgable folk reading this (in the maths area, not future telling) could give some feedback on this as I am currently wondering whether it'd be such a good idea or not to come out of the fixed term & then get another deal before things start ramping up (or perhaps they'll only rise a little?)

Nationwide tell me my penalty would be 'approx' £1,625.60. Fairly precise for an approx but there you go.

The rate on the deal is 2.14%

The balance currently sits at £81k.

We bought the house for £157k with £102k taken out.

As for todays valuation, I'm not sure. Maybe around £180k. I've seen houses in the area above that, below that so I don't know.

If you need any other info then just ask.

Would you think it'd be a better idea (save money in the long term) to come out of the fixed now and take the penalty or stick it out and lock in next time round on a higher rate?

And if the answer is anything other than don't know/who knows then how do y ou calculate that so if I'm in this scenario again I can do it myself without asking.

Thanks.

TheAble

I think 5 year fixes are currently around 2%, 2 years a bit less. But there doesn't seem a great deal of point in shelling out £1600 to move from the rate you're currently on to a new mortgage with basically the same rate. Future interest rate rises notwithstanding of course.

getmore4less

Erc 2%   3.5y in 1.5y  to go.

LTV <60% new rate 2.19% (999 fee is 1.99 but borrowing too small


missing information your payment or planned payment if you overpay.
guessing £663  to get  £102k->£81k in 3y6 month

Ditch the fix calculations.

Mortgage	£81,000
payment	£663	ERC/FEE
rate	2.14%	£1,600
new rate	2.19%	£0
Time	Years	months
Left on current	1	6
New fix term	5	0
amount left after(months)		18
Start	rate	End
£81,000	2.14%	£71,523
£82,600	2.19%	£73,235
amount left after(months)		60
£81,000	2.14%	£48,192
£82,600	2.19%	£50,150
Switch when ERC £0
Break even rate needed no fee and fee)		42
£71,523	3.070%	£50,268

your call 
Will rates hit 3%+ in 18months?

time machine mode on.

when your ERC dropped to 2% and you owed £84k  rates  you had 2 years to recover the ERC.

If you had done the calculations late  sept 2021 when nationwide had good rates(0.84% £999, 1.19%)
that was ~1% lower than your current rate most could have been recovered in 2years.

With £84k and fee option

Mortgage	£84,000
payment	£663	ERC/FEE
rate	2.14%	£1,680
new rate	0.84%	£999
Time	Years	months
Left on current	2	0
New fix term	5	0
amount left after(months)		24
Start	rate	End
£84,000	2.14%	£71,427
£86,679	0.84%	£72,106
amount left after(months)		60
£84,000	2.14%	£51,531
£86,679	0.84%	£49,783
Switch when ERC £0
Break even rate needed no fee and fee)		36
£71,427	1.216%	£49,783
£72,426	0.664%	£49,783

no fee option.

Mortgage	£84,000
payment	£663	ERC/FEE
rate	2.14%	£1,680
new rate	1.19%	£0
Time	Years	months
Left on current	2	0
New fix term	5	0
amount left after(months)		24
Start	rate	End
£84,000	2.14%	£71,427
£85,680	1.19%	£71,648
amount left after(months)		60
£84,000	2.14%	£51,531
£85,680	1.19%	£49,964
Switch when ERC £0
Break even rate needed no fee)		36
£71,427	1.313%	£49,964

less clear cut but rates started going up shortly after and any one in the "rates can only go up" camp  should have been looking at there ditch the fix

Timing that low would have been very lucky 

JustAnotherSaver

Ok I think you're saying it's best to ride it out and see the situation at the end of term?

And to answer your question, our first round of 5 year fixed we paid somewhere about £440pm.

The payments in this second and current round of 5yr fixed is £391.32.

No overpayments paid at all during that time. Sure I looked in to it some years ago and was advised on here to put that money towards retirement planning (started late at 28 & couldn't afford to pay a great deal in so pot is low).

getmore4less

JustAnotherSaver said:

Ok I think you're saying it's best to ride it out and see the situation at the end of term?

And to answer your question, our first round of 5 year fixed we paid somewhere about £440pm.

The payments in this second and current round of 5yr fixed is £391.32.

No overpayments paid at all during that time. Sure I looked in to it some years ago and was advised on here to put that money towards retirement planning (started late at 28 & couldn't afford to pay a great deal in so pot is low).

it your call on where YOU think rates are going. 

The £102k->£81k   has been done over another 8.5y not 3.5y

Using a £400pm payment it looks like this.

Mortgage	£81,000
payment	£400	ERC/FEE
rate	2.14%	£1,680
new rate	2.19%	£0
Time	Years	months
Left on current	1	6
New fix term	5	0
amount left after(months)		18
Start	rate	End
£81,000	2.14%	£76,330
£82,680	2.19%	£78,126
amount left after(months)		60
£81,000	2.14%	£64,832
£82,680	2.19%	£66,900
Switch when ERC £0
Break even rate needed no fee)		42
£76,330	2.932%	£66,899

a little lower but still ~3% is the rate to be thinking about in 18month time.

JustAnotherSaver

Seems to me you're either someone to do with mortgages & have some software for it due to the way that's laid out

Or you're just an intelligent guy who knows what he's doing. 

Or perhaps both but still. 

Just wondered if you're someone who deals with mortgages as part of their job perhaps? 

getmore4less

just do numbers, the same questions get asked a lot so add them to a spreadsheet to knock out the important bit quickly

did this ditch the fix one when people were missing out using the MSE one..

Don't forget there is the option of looking now to lock in a rate and change when the ERC goes to 1%
might need a change of lender

say you could lock in 2.19 now and switch in 6months when ERC is 1% and mortgage is £80k

Mortgage	£80,000
payment	£400	ERC/FEE
rate	2.14%	£800
new rate	2.19%	£0
Time	Years	months
Left on current	1	0
New fix term	5	0
amount left after(months)		12
Start	rate	End
£80,000	2.14%	£76,882
£80,800	2.19%	£77,739
amount left after(months)		60
£80,000	2.14%	£63,719
£80,800	2.19%	£64,802
Switch when ERC £0
Break even rate needed no fee )		48
£76,882	2.505%	£64,802

That looks a lot more attractive and you get 6 months to watch the rate movements before the commitment.

id311299

getmore4less said:

Just out of curiosity, not an attempt to hijack the thread but just questioning methodology:

It appears that the main comparison metric which is being used in your calculations is the outstanding amount at the end of each period for that scenario. When I do my own 'To switch or not to switch' comparisons, I calculate the amount of interest that will be paid in each scenario, plus overheads (fees etc.), and compare these, as IMHO they are really the true cost of borrowing. In my mind, comparing the outstanding balances is not a good tool for decision making, as they will be a function of the contractual monthly repayment, which will be different in all scenarios and can't be fairly compared as they will not have the same amount for the capital repayment component.  Am I misunderstanding / doing it wrong?

As far as the OP's question goes - I am in exactly the same scenario, with a 5y fix ending in August 2023. Probably the main decision factor is how risk averse you, as a person, are. The thought process for the decision making is roughly the same for the decision about the length of your fix - i.e. paying more for peace of mind. Once you have comparable numbers for the current and considered scenarios, the real question is 'Am I willing pay £2000 on top of what I have already commited to in order to have that peace of mind'. For a lot of people, myself included, predictability wins over purely numerical gains.

getmore4less

id311299 said:

getmore4less said:

Just out of curiosity, not an attempt to hijack the thread but just questioning methodology:

It appears that the main comparison metric which is being used in your calculations is the outstanding amount at the end of each period for that scenario. When I do my own 'To switch or not to switch' comparisons, I calculate the amount of interest that will be paid in each scenario, plus overheads (fees etc.), and compare these, as IMHO they are really the true cost of borrowing. In my mind, comparing the outstanding balances is not a good tool for decision making, as they will be a function of the contractual monthly repayment, which will be different in all scenarios and can't be fairly compared as they will not have the same amount for the capital repayment component.  Am I misunderstanding / doing it wrong?

As far as the OP's question goes - I am in exactly the same scenario, with a 5y fix ending in August 2023. Probably the main decision factor is how risk averse you, as a person, are. The thought process for the decision making is roughly the same for the decision about the length of your fix - i.e. paying more for peace of mind. Once you have comparable numbers for the current and considered scenarios, the real question is 'Am I willing pay £2000 on top of what I have already commited to in order to have that peace of mind'. For a lot of people, myself included, predictability wins over purely numerical gains.

Common error.(many calculators do that)

Lower debt for same payment cash flow is the key measure.
(I prefer the keep it easy and make the payments the same, you can track the difference with investment rates later)

The timing of the fees makes a difference.

You can then decide if different payment has some value ie. some want the smaller payment.

The important measure is what rate is break even, at some point in the future when the fees have changed.

Using contractual payment also gets it wrong if there are any plans to overpay.

You can do the numbers for what happens if you get it wrong on the guess

Downside upside for various rates.

It could be that £2k looks ok but required a unrealistic rate to be an issue.

Not on the PC to do that calc now.

getmore4less

if we go back to the switch now with 2% (fixed the numbers) and a £400pm payment.

Mortgage	£81,000
payment	£400	ERC/FEE
rate	2.14%	£1,620
new rate	2.19%	£0
Time	Years	months
Left on current	1	6
New fix term	5	0
amount left after(months)		18
Start	rate	End
£81,000	2.14%	£76,330
£82,620	2.19%	£78,064
amount left after(months)		60
£81,000	2.14%	£64,832
£82,620	2.19%	£66,833
Switch when ERC £0
Break even rate needed no fee)		42
£76,330	2.907%	£66,832

its a call on rate in 18m being under or over 2.9%
what's that mean in real money.

last column is the difference from the breakeven rate

£76,330	2.00%	£64,472	£2,360.20
£76,330	2.50%	£65,764	£1,068.65
£76,330	3.00%	£67,079	-£246.00
£76,330	3.50%	£68,417	-£1,584.15
£76,330	4.00%	£69,779	-£2,946.20