Basic Switching Question No-one answers!

Sibacky_2

I'm hoping the clever MSE people can help answer some of the questions the highly trained people at the big banks dont seem to be able to.
Firstly, all this talk of switching mortgages.
Nationwide want 1400 quid to renew my existing deal with them so I'm thinking clear off, BUT...
I have had a mortgage there for 6 years. Most of that time I have been paying mainly the interest - that is how it works I realise - but if I stay with them , I will be starting to pay a bigger chunk of the capital.
In a nutshell. How does switching mortgages save money as each time you switch you are 'starting again' and paying mostly interest. This applies even if you keep the mortgage term the same - ie, if I switch and take one out for 19 years.
Am I missing something???

[Deleted User]

If it's £1,400 - I assume it's actually £1,499 - presumably they're offering you the two-year tracker at 5.58%? If you've nineteen years left on the mortgage, you're probably paying quite a bit of interest, so this is probably a better deal for you than the trackers that have lower arrangement fees, but higher interest rates.

That said, if you can comfortably afford to pay more (don't overstretch yourself), than this is the ideal time to think about shortening your mortgage term. We've done that each time we remortgaged. It's also worth remembering that Nationwide mortgages are flexible so you can overpay by up to £500 a month on Tracker or Fixed rate mortgages.

Switching mortgages generally saves you money because you're often paying less than you would pay if you simply let your mortgage go onto the Standard Variable Rate. (That's 6.99% for Nationwide at the moment.) So if you went for this deal, you'd be paying 1.41% less interest than you would otherwise. The question is whether that 1.41% interest "saved" over two years is more or less than the £1,499 arrangement fee. This would depend entirely on how much you have left on your mortgage, and how much you'd pay off in two years. Also, once the term is sufficiently short, you're no longer paying mostly interest; you're paying more off the capital off each month (you have to, in order to pay off the debt by the end of the term) but because you're making bigger payments each month, the amount of interest you're charged falls more quickly.

Disclaimer: I'm just a Nationwide customer (who happened to get his mortgage arranged today), not a financial adviser of any kind whatsoever!

Sibacky_2

Thanks Marvin. Have you ever tried getting them to reduce the fee?
It was only two years ago that the fee was less than half this!
I know credit crunch etc is too blame but it seems extortionate. I take it you have looked around and this is still a good deal then?
Also, anyone know the answer about switching!?

[Deleted User]

Sibacky wrote: »

Thanks Marvin. Have you ever tried getting them to reduce the fee?
It was only two years ago that the fee was less than half this!
I know credit crunch etc is too blame but it seems extortionate. I take it you have looked around and this is still a good deal then?

From what I've seen, a lot of banks and building societies are charging high arrangement fees for some of their products. I know what you mean: when we took out our fixed-rate mortgage in 2005 we only paid £349.

It doesn't hurt to shop around, though you may want to consider that you may have to pay valuation and/or conveyancing fees if you change mortgage provider. Some lenders may pay these for you.

Our situation is a little different to yours: as we're looking at a three-year term, there wasn't much point to switching to another provider (valuation, conveyancing and arrangement fees would have wiped out any potential savings we might have been able to make through more competitive interest rates), so we stuck with Nationwide and went for a no-arrangement-fee product.

Also, anyone know the answer about switching!?

If you mean switching to a new deal, it usually "saves" money because the Standard Variable Rate is not somewhere people want to be - the interest rate is often a fair bit higher than their other products. If you mean switching to a different provider, then this can often save money in situations where the products your current provider has to offer simply aren't the best you could get. It really does depend on one's personal situation, though. Sometimes, like in our case, it's not worth it; other times, like when we switched from NatWest to Nationwide, it can work out really well.

dimbo61

why are you looking at 2 year deals ??
you still have 19 years left to pay off the mortgage at the moment
unless you increase the amount you pay each month as the interest rate
is going to be higher than the one you are paying now.
now unless you expect to win the lottery , get a big pay out from where
ever ?? start thinking long term.
look at 5/10 year deals with flexability to overpay .
the costs to set up are easier to take if considered over 5/10 years
this will also save you the trouble of re- mortgaging every 2 years
good luck

Sibacky_2

Thanks for your replies.
I am indeed thinking of the 5 year deal which is fee free.
But still I dont have the answer to the million dollar question!!!!!!!!!!
If I switch mortgages now to a new company I will be starting the repayment curve again and PAYING BARELY NOTHING OFF THE CAPITAL AMOUNT for the first few years. If I stick with existing mortgage I will be starting to pay off bigger chunks of the capital.
So how does switching mortgages every two years save money????????
Sorry to go on but it is driving me nuts!

[Deleted User]

Sibacky wrote: »

Thanks for your replies.
I am indeed thinking of the 5 year deal which is fee free.
But still I dont have the answer to the million dollar question!!!!!!!!!!
If I switch mortgages now to a new company I will be starting the repayment curve again and PAYING BARELY NOTHING OFF THE CAPITAL AMOUNT for the first few years. If I stick with existing mortgage I will be starting to pay off bigger chunks of the capital.
So how does switching mortgages every two years save money????????
Sorry to go on but it is driving me nuts!

I'm sorry it's taken me so long to understand what you were getting at! I think the problem here is with your premise: "If I switch mortgages now to a new company I will be starting the repayment curve again and PAYING BARELY NOTHING OFF THE CAPITAL AMOUNT for the first few years."

This is not true, if you switch to another mortgage with the same term as the one you'd be on if you stayed put. If you've the option of a nineteen-year mortgage at 6% with your current lender and a nineteen-year mortgage at 6% with a different lender, assuming the products work in the same way, you'd be paying exactly the same with both lenders: the same interest, the same amount off the capital each month, the same redemption date, the works. If the interest on the loan was £450 a month and you were paying £650 a month, you'd be paying £200 off the capital each month no matter whether you stayed with your current lender or switched to a different one. You don't "start the curve again". Nor do you end up paying more interest (and therefore less off the capital) merely by switching lenders.

Or to put it another way, a nineteen-year curve isn't quite the same shape as a twenty-five year one. Rather, it's equivalent to jumping into the twenty-five year curve at the beginning of year 7. So you "skip" those first six years where much of what you're paying is interest.

You'd only be "paying barely nothing off the capital amount" if for some reason you went back to a longer term, or if the interest rate itself were worse. Which, in general, someone would only do if they were finding it hard to make their monthly repayments, if their circumstances or priorities had changed or were expected to change, or if they were borrowing more.