Higher initial payment on remortgage wipes out savings from switching?

Boxer55

I'm currently looking to remortgage as my 2 year fixed term is coming to an end. My current lender has offered me another 2 year fixed deal at 5.19% and my mortgage broker has suggested that I switch to a different lender that has a lower 5.04% fixed 2 year deal. The reduction in interest rate will save me around £400 over the fixed 2 year deal.

However, moving mortgage lender will mean that I incur a higher initial payment with the new lender (to cover the interest accrued between the mortgage completing and my first payment). This is of course very standard and the illustration says that this could be up to approximately £600.

So, by my maths I'd be crazy to switch lender as I'll end up £200 worse off overall.

I've struggled to get a satisfactory answer from the mortgage broker as to why I'd be better off switching. Am I missing something?

ACG

You wont make a payment that first month, the second month is when you make in essence a larger payment to put you back on track. 

Its not an extra payment, its closer to (but not quite) miss a payment and then pay double.

Boxer55

Thanks for the reply ACG.

So the first month effectively becomes interest only and for that month I won't pay any capital off of my balance?

amnblog

Every day throughout the swop to a new Lender you will be paying interest on the borrowing. Either to your current Lender, or the new Lender.

The new lender produces a Mortgage offer (as all Lender's have to by law) in a set format.

In section '6 Amount of each instalment' your offer says something like

One payment of £1,220.65.

Then:

£800.49 until 30th September 2026

£1055.79 until 31st August 2049

The initial payment (£1,220.65 here) consists of a standard monthly payment and daily interest from the day you complete to the end of that first month.

The Mortgage Offer has to assume a date in the month when the new Lender takes over and that date is the first of the month. Hence the large figure.

If you complete later in the month, the figure for the first payment to the new Lender will be much lower but your settlement figure from the current lender will be higher as you will be paying more daily interest in the month of completion to them.

The bottom line is, a 0.15% saving on £130,000 over two years is worth about £400.

Hoenir

Any fees involved in switching lenders? 

Boxer55

Hoenir said:

Any fees involved in switching lenders? 

No, no product fees and legal cost are covered by the new lender.

Boxer55

amnblog said:

Every day throughout the swop to a new Lender you will be paying interest on the borrowing. Either to your current Lender, or the new Lender.

Thanks amnblog, your explanation has really helped.  I was mistakenly thinking that the higher initial payment was additional interest that I wouldn't have been paying if I'd stuck with my current lender.  As you've highlighted, I always have to pay interest to one lender.

I will be completing on the first of the month and assume my first payment will be on the first of the following month.  So, if I'm understanding correctly....
- Month '0' the transfer month, I'm accumulating interest with my new lender.
- Month 1, I'm paying a standard month plus the interest accumulated during month 0
- Months 2-24 I'm making standard payments.

So ultimately when comparing months 1-24 with the new lender I will be paying less interest and saving money.

But does this mean that, the mortgage transfer generates a month '0' for which I'll be paying interest but not making a capital payment?

user1977

Boxer55 said:

amnblog said:

Every day throughout the swop to a new Lender you will be paying interest on the borrowing. Either to your current Lender, or the new Lender.

But does this mean that, the mortgage transfer generates a month '0' for which I'll be paying interest but not making a capital payment?

No. The figures are calculated daily, but (normally) only paid monthly. The only difference is that the first payment covers an unusually long number of days.

amnblog

But does this mean that, the mortgage transfer generates a month '0' for which I'll be paying interest but not making a capital payment?

Yes, I guess you could say that. That is effectively how the maths work. If you multiple your mortgage size by the interest rate, divide by 12, and add the the initial ongoing monthly payment, you should get close to the initial payment figure. 

That is effectively how the maths work.

Boxer55

amnblog said:

Yes, I guess you could say that. That is effectively how the maths work....

Thanks amnblog, for clarifying my understanding

The reason for digging in to this so much is that my priority is clearing my mortgage by a specific date.  So if I've understood correctly by switching I will save money in interest but because of the introduction of the transfer month (month 0) I will not clear the mortgage as quickly.  So if I just make an over payment equal to the capital I would have paid off during the transfer month I'll be all square again?

Thanks in advance for the help, I appreciate it!

housebuyer143

Boxer55 said:

amnblog said:

Yes, I guess you could say that. That is effectively how the maths work....

Thanks amnblog, for clarifying my understanding

The reason for digging in to this so much is that my priority is clearing my mortgage by a specific date.  So if I've understood correctly by switching I will save money in interest but because of the introduction of the transfer month (month 0) I will not clear the mortgage as quickly.  So if I just make an over payment equal to the capital I would have paid off during the transfer month I'll be all square again?

Thanks in advance for the help, I appreciate it!

You mentioned completion on the 1st? 

Just ensure it's a Tuesday and not a Monday because otherwise the solicitor will be ordering the money on the Friday and you will have to pay an additional 3 days interest for them to hold it over the weekend in readiness. That's 3 days you are also paying to your old lender.