Thinking out loud at the moment. I am 3 1/2 years in to a 5 year fixed rate mortgage @ 1.91%, current offerings are @ 1.15% for another 5 year fix. Taking in to account the early repayment charge, the move to the new mortgage now will not cost me anymore than if my current offer was to be extended for the next 5 years. So, given that rates are low and there is talk of them increasing what would STW do?

Extra details

– No plan to move in the short term
– Could use this as an opportunity to borrow more for an extension

Sounds like a plan to me, obviously if it was me I’d want all the details on costs etc.

Some are predicting that rates could rise as early as Dec, but only to 0.25% which might not effect mortgage rates. 1.15% is cheap, but it’s still 1.05% over base for a almost zero risk mortgage. That said, they’re predicting a steady return to the new, new post-brexit normal of 1% by the end of 2022, and the BOE, via Mark Carney (so a while ago and pre-Brexit) suggested the new, post-credit crunch BOE rate should be around 3%.

That said, I think a lot of armchair experts (like me) are not looking past ‘rising inflation = higher rates’, inflation isn’t being caused by a booming economy that needs cooling to avoid a bubble, it’s being caused by supply and trade deal issues and whilst a few people are seeing the benefit of ‘levelling up’, lorry drivers mostly, most aren’t.

Rising interests rates at the same time as taxes won’t fix that, it will only push us closer to recession.

But anyway, back on the OP, it sounds like a no-lose gamble to me. You switch now, you pay the fees but you get that back thanks to a lower rate. If rates rise in the next 2.5 years (which they sort of have to) you win. They can’t fall. You could gamble on switching from a 5 year to a 2 year to shave a few interest points, but that’s not a great idea IMHO.

5 years should be plenty of time to ride out any interest rate shocks, or post-property boom corrections.

Seems sensible – if interest rates change over the next couple of years the only way they’ll go is up so now is likely to be the best/only chance for the next few years to get such a low rate. I guess the only thing you have to lose is the difference between the next 18 months of repayments (on 1.91% vs 1.15%) and the early repayment charge – I would assume the repayment charge is more than the saving over that period but likely not much.

If you borrowed extra for an extension then 1.15% isn’t much more than the Premium Bonds return rate so you could even stick it (£50k anyway) in those for a while and wait/hope for the building supplies/labour shortage to alleviate (although not sure technically if you’re allowed to do that under the conditions of a mortgage?)

Why not fix for longer? If the expectation is that rates are going up, then fix long term. We recently remortgaged and there were 7 and 10 year fixes readily available

Premium Bonds… (not sure if you’re allowed to do that under the conditions of a mortgage?)

Don’t think there are any conditions- as long as you’re meeting the monthlies.

When we took out a mortgage to pay for an extension, when the mortgage completed the funds went into our bank account. It was a few week before the work started and a bit longer before the first installment to the builder was due so we could have done what we wanted with the cash.

Why not fix for longer?

You don’t tend to get such good interest rates on longer fixes, depends on how you think the interest rates will look in 5+ years time.

I remember fondly* fixing at 5%ish for 10 years in 2006 thinking that interest rates would NEVER get any better than that!

*meh.

@P-Jay Good point about the rate rises not being directly related to inflation and the supply chain issues driving up costs.

@FuzzyWuzzy Yep, putting it somewhere for a short while, 12-24 months I’d guess if we borrowed more for the extension.

@towpathman The next longest fix is 7 years @ 1.49, so a slightly worse position. Also my daughter would be just going to secondary school then so that may trigger a move.

So, given that rates are low and there is talk of them increasing

Rates are so low they can only go up. That’s been the talk for the last 15 years, while rates have kept on going down. If the banks are still offering these low rate fixed deals then they aren’t expecting a rise any time soon.

timely thread, ive just been looking into this myself.

4 years left on the mortgage, just over £25,000 to pay, got 2 years left on the fix @2.15%, then it goes up to 3.59% for the last 2 years, altho i assume that that figure is just what it would be today. it could be absolutely anything in 2 years couldnt it depending on the rate at the time? is that right? or are they guaranteeing itll be 3.59%?
anyway, we’re looking to consolidate and pay it off by retirement date in 3 years time, so ideally a 3 year fix.

ive just rang barclays to see if they can waiver the early repayment charge if we remortgage with them but they wont, so that leaves the whole market open.

they did say tho that they have 2 products to choose from….
1.32%, no fee, £726 p/m (few quid less than we pay now). or…..
0.99%, £999 fee!, £722 p/m

not being financially astute, i dont know why anyone would choose to pay £999 to save £4 a month but im mebbes missing something.

so, saying that the monthly repayment would roughly stay the same, but mortgage paid off a year earlier, i cant see why we wouldnt. the early repayment charge is around a months payment so gaining 11 months if my maths is correct.

just need to see if i can find a better fix elsewhere now that we dont need to stick with barclays, altho a quick look suggests theyre all much of a muchness so probs easier to stick with them.

3.59% was probably the SVR at the time you took the fix and they they quoted it as an illustration. As you say, at the end of the fix, who knows what the svr will be? Do you have the ability to overpay before any ERC is due? That may reduce the amount charged & bring the payment period

Do you have the ability to overpay before any ERC is due?

we’re overpaying now by £100 a month to get it down as quick as poss. to avoid the ERC i think we’d have to either pay it all off within those 2 years, or keep this mortgage for 2 years and gamble on whatever comes next, which could be far worse than it is currently? does that sound right?

TLDR: we cant afford to pay it off in 2 years

not being financially astute, i dont know why anyone would choose to pay £999 to save £4 a month but im mebbes missing something.

those products are the same that are available for everyone. For £25k it doesn’t work out but on a £500k mortgage 0.33% would save over £1650 per year. The break even is probably around £160k.

I’d be careful of fixing when its the last bit of a mortgage as they might limit overpayments, which limits your flexibility. I went onto a tracker for the last year, which meant I was able to pay what I wanted, when I wanted – and with a small amount outstanding, it didn’t really matter if the rate rose by a couple of percent.

those products are the same that are available for everyone. For £25k it doesn’t work out but on a £500k mortgage 0.33% would save over £1650 per year. The break even is probably around £160k.

which makes perfect sense and is why as i say, im not financially astute 😀

I’d be careful of fixing when its the last bit of a mortgage as they might limit overpayments, which limits your flexibility.

we overpay now, and the ‘new’ figure p/m would be about that figure (slightly less by a few quid). i cant see our income going up in the next 3 years, so doubt if we could go any higher anyway.
if we dont fix, might we have made a booboo if the rates rise, which is whats made us look at it now?

they did say tho that they have 2 products to choose from….
1.32%, no fee, £726 p/m (few quid less than we pay now). or…..
0.99%, £999 fee!, £722 p/m

not being financially astute, i dont know why anyone would choose to pay £999 to save £4 a month but im mebbes missing something.

so, saying that the monthly repayment would roughly stay the same, but mortgage paid off a year earlier, i cant see why we wouldn’t. the early repayment charge is around a months payment so gaining 11 months if my maths is correct.

Typically fees are added to the balance rather than paid, it’s a way for them to advertise very low rates, but they have to offer you all the deals they have.

For you, with such a short term and relatively small amount (if £25k can ever be a small amount of money) taking the fee option makes no sense, you’re only paying £500 or so of interest over 3 years, it makes not sense to pay £1k to slightly reduce that.

But you’re right, if they want £700 to get out early, and it’s going to save you a years worth of repayments, it’s certainly worth it.

You could go into really fine detail and try to calculate cost of staying in your current deal for another years at 2.15% and then re-mortgaging to avoid the fee, but I doubt it’s any cheaper and you’re gambling on rates rising and of course getting a 1 year mortgage (I’m sure you can).

If I was in your shoes, and I could finish a year earlier than expected AND never have to worry about rates again. I’d jump at it.

We have just fixed for 5 years at 1.17%.

We are able to overpay by 10% annually.

We have also worked out that S&S ISA savings (lump and monthly) are currently earning far more than the 1.17%, and so are equally overpaying mortgage and saving into the ISA’s. I have in theory 14 years of mortgage left – but with our savings and future savings each month, based on past few years performance, we may be able to pay off mortgage at the end of the 5 years.

@sadexpunk – what is the ERC? on a £25k mortgage the difference between your current rate and your new one (0.8%) is £400 over 2 years. I’d be surprised if the ERC was less than that by enough for it to be worth the ballache of changing providers? Either way, I don’t think your calculation of ‘paying it off a year earlier’ is right.

in 2 years you’ll owe ballpark of £5k. at that point the interest rate really doesn’t matter – paying £800 per month it should be done in ~6 months, the rate would have to be in the region of 15% to add a single month to that amount.

@sadexpunk – what is the ERC? on a £25k mortgage the difference between your current rate and your new one (0.8%) is £400 over 2 years.

ooh this’ll be interesting then, to see if my working outs flawed….

ERC + some other admin fee come to about £800.

so as it stands i continue to pay £750 p/m (650 + 100 overpayment) for 2 years, the 2.15% ends and we have 2 years left at 3.59% (or whatever it is at the time)

or….. pay the £800 to come out of it, get a 3 yr fix at same £750 (bit less, £730 i think).

so simplistically (or not), that sounds like im paying the same £750 until the end of the term, which is now 3 years rather than 4. minus that £800 ERC which is very roughly 1 months payment and im left with 11 months to the good?

that seems to be at odds with your £400 line in the sand, have i got it wrong somewhere?

thanks

EDIT: im not sure if my current overpayment of £100 may be skewing the figures…..

I think you need to ignore the monthly payments and look at how much is being paid off. Mortgage calculators are really good for this – I use https://www.bankrate.com/calculators/mortgages/amortization-calculator.aspx

putting your numbers in – you owe 25k now, at a rate of 2.15%. paying £750 (an effective term of just over 34 months, even if you stop after 24) a month means that in 2 years you owe pretty much £7k. assuming the rate is 3.59% (you can probably remortgage at this point to a lower rate..), paying the same £750 a month you end up paying everything off in august 2024, 34 months @ £750 and 1 month @ £350 – total cost £25850

if you change to the new rate, paying £750 a month will complete the mortgage in 34 months – so a cost of £25,500, but you have to pay £800 to get there, so total cost is £26,300.

new deal costs you £500 more. The interest rate would have to be 16% in 2 years time (ish, i CBA to play with the figures to work it out exactly) to make the new deal cheaper

Something else to consider if you remain with the current deal, after 2 years will you be able to get a mortgage with only a 1 year term if you want to pay it off in 3 years vs 4?

If the £750 pcm is affordable, I’d convert to the 3 year fix with the mortgage paid off at the end. You’re no worse off than now, it’s a known quantity each month and you’re not at the mercy of rate increases.

For a rate of 1.32% and on a low balance by year 3, you’re not making a huge gamble on interest rates being lower in that year had you stuck to the current deal.

thanks both, altho its confused me even more now!

wheres the flaw in my working out then, where i get that we’d pay the same each month with both choices, but pay it off 11 months earlier at a saving of just over £8,000 (11 X £750)

what have i not taken into account?

thanks for your help.

what dates do you have for paying it off in each circumstance?

2 year 2.15% fix ends october 2023, then 2 years at 3.59% (or whatever) for another 2 years. as i type this i realise tho now that overpaying will mean that itll be less than 2 years at that rate.

the new 3 year fix would mean it’d be finished in october 2024.

or….borrow £100k @2% and invest it in the stock market for average gains of 7% and pay off the mortgage whenever you get bored of buying bikes 😉

or….borrow £100k @2% and invest it in the stock market for average gains of 7% and pay off the mortgage whenever you get bored of buying bikes 😉

if only banks thought of this and offered products with these two factors wrapped together. They could call them, ooh, i dunno, endowment mortgages, and everyone would have low monthly payments and nothing would ever go wrong, like people owing a fortune at the end of their working life..

2 year 2.15% fix ends october 2023, then 2 years at 3.59% (or whatever) for another 2 years. as i type this i realise tho now that overpaying will mean that itll be less than 2 years at that rate.

yeah thats where the difference is, both pay off within 2 weeks of each other, in oct/nov 2024, but the new rate costs you £800 up front which (if you added it to the mortgage) would effectively make you pay it off 2 weeks later.

Just coming back to this. As a reminder my current deal has approx 18 months left with an ERC of 4k if paid in the next 6 months and 2k in the last 12. Looking at it a bit deeper, if I changed now without additional borrowing there’s about a 2k loss over the 18 months, which equates to about a 0.5% rate rise at the time of remortgaging. If I sit it out for 6 months it breaks even.

Hmmm, I guess it is all down to whether we want to borrow now for the extension so we can take advantage of the current low rate and increased valuations of property. Compared to a potential increase in rate and drop in market value.

thanks both, altho its confused me even more now!

You’re overthinking this, a back of the fag packet shows there’s SFA difference and with interest rates so low – little to be saved vs hassle/time.

We’ve a small mortgage that’s got a few years left, and we could pay it off – but I’d rather the cash was available, than have to go and borrow/sell/trade etc if we needed a ‘lump’.

If you’re a bit tight of cash, maybe look at extending the term by a couple of years?