Mortgage rate sanity check - adding fee to loan

bailey_win

Remortgaging using a broker.

Currently owe £287,292.

Agreed a 5 year fixed mortgage over 28 years.

The broker has suggested the best option is Halifax @ 3.94% with no fee.
They've mentioned there's another Halifax product @ £3.83% with a £999 fee, but that this works out more expensive because I'd be adding the fee to the loan.

I've had a think and plugged some numbers into a spreadsheet but it seems like it doesn't add up to me?

Specifically:
£287,292 @ 3.94% costs £1,413 a month, which is £84,777 over 5 years
£287,292+£999 @ 3.83% costs £1,400 a month, which is £84,001 over 5 years
The 3.83% is £776 cheaper

After 5 years:
On 3.94% I'll still owe £256,200
But on 3.83% I'll instead owe £256,612
So the 3.83% has a higher end balance of £412

But overall I'm still up £364?

I had a similar discussion last time I took a mortgage out and I had to "convince" the broker to let me do it and I want to make sure I'm not doing something stupid!

amnblog

Yes, your figures are pretty accurate. 

MWT

bailey_win said:

So the 3.83% has a higher end balance of £412

But overall I'm still up £364?

I had a similar discussion last time I took a mortgage out and I had to "convince" the broker to let me do it and I want to make sure I'm not doing something stupid!

Not stupid, but to remain £364 up you'd need to take the money you've saved and pay off the £412 balance difference, otherwise you continue to pay interest on that amount over the rest of the life of the mortgage.

housebuyer143

To work out the true cost of the fee, I would divide it by the number of months of the fix, so in this case 60 months. 
This would be £16.60 a month there abouts. So then I would calculate the monthly payment on the higher rate and then the lower rate but add the £16 to the lower one. Then I go with the cheapest monthly rate, whether it be the higher one or the lower one 

Although you add it to the loan, you will almost certainly remortgage at the end of the 5 years and then potentially pay the fee again so I don't tend to calculate the fee over the entire loan term when making the comparison. Maybe your broker is thinking along the same lines?

bailey_win

To update this - I spoke to the broker and they admitted they'd got their numbers wrong and I was on the right track.

ElwoodBlues

Over the 5 years, your average mortgage balance will be about 245k. The difference in interest over the fixed term will be about £1350 (.11% x 245k x 5). So paying the £999 fee saves you about £350.

If you pay the £999 up front (or immediately overpay your mortgage) then you'd be £350 better off. But adding it to the mortgage balance (i.e. financing it over 28 years) will incur a fair chunk of interest. If rates average 4% for the remainder of your mortgage, that £999 fee will cause an additional £1500 of interest.

So it all depends on whether you pay off the £999 quickly and what you think interest rates are going to do over the next 3 decades. Even if rates average 1% over that time (highly unlikely I'd suggest), there would be about £500 interest on your £999 (inc about £200 during your yr fix at 3.83%.

Basically, if you add the fee to the loan, you're going to end up paying more overall than the £350 you save in interest over the next 5 years.