Help understanding fee vs no fee options

paul_l

In the past I've generally just looked at the difference in monthly payments between the fee & no fee option with a lender to decide if paying the fee was worth it (eg for a 2 year deal is 24 x the difference in monthly payments greater than the fee for the lower interest rate?).

However when looking at my current deal renewal offer from Nationwide, even though the difference in payments over the 2 year term (£784) is less than the £999 product fee, Nationwide are still claiming that the deal with the fee is cheaper than the no-fee deal as their illustration shows an extra £457 capital is paid off during the 2 years on the paid fee deal.

I was expecting that for the same length of a loan, the principal paid off each month would be the same regardless of the interest rate in order to reach a zero balance at the end of the term, and that the variation in monthly payment between the two deals would be purely due to the interest charged each month.

Am I missing soomething here, or does the rate at which the principal loan amount is repaid vary by the interest rate that is being charged?

(for clarity I'm ignoring the add fee to balance option as that relaly doenst make sense if I can afford the fee)

Linton

With a mortgage the amount you pay each month is calculated so that the payment is constant over the full term of the mortgage.  That means that initially most of your monthly payment goes into paying interest since you have a lot of money borrowed and by the end of the mortgage your payments almost entirely go to paying off your loan since there is very little money borrowed.

Now if the interest rate was zero you would repay the same amount of the loan every month.  The higher the interest rate the less the amount of money going into paying off the loan in the early years.

Nailer99

Counterintuitive but I think it is correct. If you have a lower rate of interest less interest will be accrued, and this is different to the difference in monthly payments. Good advice by the bank, I think!

paul_l

I'm aware that as time goes by, and the capital is paid off, there is less interest & more repayment each month.

What I dont understand, is if the capital is being paid off more quickly at a lower interest rate, then the capital would be paid off in less time, and the mortgage term would be shorter?

Or perhaps I'm overthinking it. £457 additional capital repaid every two years would only amount to (very approximately) one monthly payment every 8-10 years, and the rate of repayment would be adjusted at each product switch anyway

kingstreet

If you obtain illustrations, the pages at the end show the outstanding balance throughout the mortgage term. This should be helpful in determining the correct option at the outset.

I have two illustrations in front of me. One is a two year fix at 5.52% with no fee. The other a two year fix at 5.01% with £995 fee.

At the end of the fixed period, the fee-free product has seen £35,589 repaid. The other, £37,598. That's a net difference of £1,000 give or take, after the fee.

Beyond the fixed period, the illustration assumes SVR applies and the balances only meet a few months before the end of the twenty year term.

You therefore need to take into account the difference in the balance at the end of any initial period as this will also impact how much interest you will pay for the remainder of the term should you seek a remortgage or product switch.

Davejones22

You can use an amortization calculator to see the principle for yourself - type it into Google and put the figures in for a few different interest rates and you can see how it varies after x no. of years.

I suspect a lot of people forget to take this into account when comparing interest rates and choosing to pay an ERC or not, for example.