My current 3 year mortgage deal is coming to an end in december, so the interest rate will be dropping from about 6.59% to roughly 2.5 - 3%.

Now I have worked out the amount of money I will be paying back on the new interest rate, but this doesnt coincide with the price the mortgage companies are quoting me. It looks like the amount of capital payment will be going up for some reason, but surely if that is the case then my mortgage will be paid off quicker? After consulting with someone on the phone from santander this is not the case and my mortgage term length will stay the same, but he couldn't explain why the capital payment is going up?

Can anyone shed some light on this for me?

Is your original mortgage an interest only mortgage? Does the default make it repayments on full amount?

No it will be the same type of mortgage paying off interest and capital. The only difference will be the interest rate.

Surely there is some brain box on here that has the knowledge?

How much do you owe?
How much is house worth?

Mine was 5.95 so was payin £780 / month for 3 year (30 year mortgage)

Now stayed with 1st direct and got a tracker 2.19 above interest rate so is now 2.69 the LTV (loan to value of house is 65%) this is for 2 year then will revert to there rate of 3.65%..


I think they know interest rates are not moving for a while

A bit more if I continue to Pay £780 it will be paid off in 18 years thus cuttin 9 years off and I presume your should do he same unless you had an interest only mortgage !

Obviously the capital is not paid off evenly - at the start it's mostly interest whereas the last payment is virtually all capital. This makes the calculations complicated.

The original rate you quote seems very high - are you sure it is right?

If you want to state the value of the mortage, the remaining term, the old and new rates excel has formulae thta can check it. I could do it later.

The company will always adjust the payments to keep the term right though, unless you ask for a change in term/overpayments.

I can't remember the exact rates and as I am at work I don't have access to them.

I did check it on an online mortgage calculator at work using rough figures for the interest rate and you will get the idea of what I am trying to understand:

£78,000 mortgage
20yrs left

6.69% = £598 per month
£434.85 is interest
£163.15 is capital

3.59% = £461 per month
£233.35 is interest
£227.65 is capital

so with the same amount on the loan and the same length of mortgage I pay more capital back with a lower interest rate. What I am struggling to understand is why my mortgage wont be paid off quicker if I am paying more capital back?

I assume both examples were done using 20 years as the loan period?

Correct

I am no expert but that must be the reason. The key is the 20 years, so the figures will tweak with that time period in mind for both deals. Of course, you can shorten the term by overpaying, or actually get a working out for a shorter loan term. I have never understood it, but it just comes down to capital and interest, and during the early years of the deals, what we pay tends to clear mostly just the interest to begin with, and it isn't until much later into the deal that capital is actually paid off.

The capital repayment needs to be more on the lower interest rate at the beginning. There will come a point in the higher interest loan when the capital repayments overtake the lower interest rate capital repayments.

Think about the last repayment of both loans. Both final payments will be practically all capital and the 6.69% will be £598 capital and the 3.59% will only be £461.

If that doesn't make sense I can Email you a spreadsheet that might make it easier to understand.

jeffersdn,

Quick question.

Are you keeping the same overall payment of £598 per month now that the rate is dropping?

Ok guys, I sort of understand what is going to be happening long term now then. Thanks for the info.

Ashers, no I will be taking the lower payments they offer me.

That is why your term is staying the same.

If you keep your payments the same as they are, you will be paying back the mortgage quicker.

As per your example:

£78,000 mortgage

6.69% = £598 per month = 20 years

3.59% = £598 per month = 14 years

jeffers, if you are only changing because the deal is coming to an end and you can afford to keep paying the current amount each month, then do so. Still take the lower deal, but set up a standing order for an overpayment which equals the difference between the two deals, so you are effectively still paying the same each month, but a reasonable amount of that will be an overpayment. Most deals will allow about a £500 per month overpayment so you should be fine.

Sounds like a good idea, but I will more than likely be made redundant next year at some stage, so wouldn't want to commit to anything long term.

You don't have to commit forever.

It will normally be part of your contract that you can overpay by 10% per year.

That is why you should still opt for the low amount so you are not committed to having to pay more, and you can always stop the over payments. However, really do try and make over payments for as long as you can. I assume you have redundancy cover?

You mean mortgage protection? Yes, I have that. Think its for a year?

Now the big decision is whether to go for fixed or variable, 2yr 3yr or lifetime?

Well only you can really decide what kind of loan deal you want to go for. Personally, I very much like knowing what I will be paying, so I go for fixed longer term deals.

However, one very important thing to consider is that arrangement fees for mortgages are going through the roof these days, and so if you only go for a 2 or 3 year deal, you need to take into account regular arrangement fees to pay.

To answer that question, you need to answer the following:

What do you think rates will do in the next few years?
How much can you afford rates to rise by?
Do you wish to have security of fixed monthly payments?