Mortgage advice. 5.54% with 1k fee, or 6.04% with no fee

phatsion2

HI,
our fixed rate is comming to an end, and we have been looking around for new rates.
the best we have found is with our current lender.
This is a rate of 5.54%, but there is a £995.00 setup fee.
or they have a 6.04% with no fee.
Both these are over 3 years by the way.

I have worked it out that im much cheeper on the 6.04% with no fee.
but this doesnt seem to make sense to me. i just checking im not missing sometihng. below is how i worked it out.

monthly repayments over 3 years @ 5.54% = £404.07
monthly repayments over 3 years @ 6.04% = £418.86
differance between the two =£14.79 per month.

14.79 x 36 ( 3 years of repayments ) =£532.44

So over 3 years, i am £467.56 better off going for the higher, fee free rate?

Does this all seem right?
just doesnt seem right that you would pay a big upfront fee, and be worse off.

Many thanks.
Sion.

UK007BullDog

Yup that is correct and you answered your own question. The smaller the mortgage the better to go for a higher rate no fee option. I bet your mortgage is around £50K ???

pollyanna24

You've worked it out pretty similar to how I would have done.

I would have done:-

5.54% - (£404.07 x 36 months) + £995 = £15,541.52 (total cost)

6.04% - £418.86 x 36 months = £15,078.96 (total cost)

Difference being - £462.56 with the 6.05% being cheaper overall. This is why they say don't be tempted by the lower interest rate.

Make sure that you won't have any other fees and of course, I could only go on your monthly figures being correct as you never said how big the mortgage actuall is, so double check that is what you'd be paying each month.

JimmyTheWig

I wouldn't just go on the three years of repayments. If you do it that way, you also need to check what your outstanding mortgage balance would be at the end of the three years.

But I guess the general rule is that for people with a low mortgage they are better off with a higher interest rate and no fee, while someone with a high mortgage is better off with a lower interest rate and higher fee.
So to answer your question you would need to tell us what your outstanding mortgage is.

The difference in interest rates is 0.5% a year.
From the repayments you are quoting, I'll guess you've got something like a 75k mortgage.
You won't pay much off this in the first three years, so lets say with the higher rate you'll pay 0.5% of this amount a year extra for the three years. This works out as 75000 x 0.5% x 3 = £1125.

So one way you'll pay £1125 in extra interest and the other way you'll pay £1000 extra in a fee.
So it looks to me like paying the fee is worth it.

The break even point is if your mortgage is about £67k. If it's less than this take the higher interest, if it's more than this pay the fee.

But I'd get someone to clarify this as it doesn't tie in very well with the figures you have given. Did they give you a print out of how much would be outstanding after each year? If so, can you find the figures for after the third year?

osagefo

It seems right to me but you should provide your outstanding mortgage amount so that we could do the math properly. Generally, the larger the outstanding mortgage amount the better of you will be with the upfront payment which then means a lower interest rate. Simplistically, £995 forms about 1% interest on a 100k mortgage, 2% on a 50k mortgage, but 0.5% of a 200k mortgage. You may actually be better off paying £995 upfront, which then means your mortgage debt will be reduced and so even though you are paying a slightly higher rate you will be saving even mor money than what you have quoted.

Ps. These are just my thoughts, I have no qualifications on this to provide professional advice.

osagefo

Cross posts but I think basically saying the same thing so I will keep.

UK007BullDog

Also if you have £995 then it would be better to use it to pay off the loan.

Alternatively if you add the fee to the mortgage you will be paying interest on it for the remainder of the mortgage and not just for the three years of the deal. You could make monthly overpayments to clear the fee if added to mortgage to reduce the interest payments.

But would need the amount of mortgage still outstanding to see exactly which one is better. But think you have worked it out well for yourself.

phatsion2

Hi,
thanks for all the quick replys.
the outstanding ballance is £67.00 ( or there abouts )
So as far as what i pay out each month, im cheaper with the higher rate.
So i guess it all depends on how much i will have payed of the debit in 3 years. - bit if £67K is the break even point. then looks to be a better deal for me on the higher rate?

Cheers.
Sion.

phatsion2

also, i dont have the £995, it would be added to the load if i went in that direction.

UK007BullDog

Remember the aim is to pay off the mortgage not to add fees to it and be worse off over the long term. If you can overpay even if just for £50 per month or even as little as £20 will make a difference over the years.