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They have been told that they will have to pay a £6000 penalty with Abbey for a mortgage of £200,000 if they want to change. Would this be worth doing in the long run and if so with whom, or what would you advise?
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0Hi there,
see here:
http://www.fool.co.uk/qanda/49688.aspx
for a very similar question and the answers. Refer particularly for the comments there re changing to a tracker deal.
Also, there was a fool article recently:
For your case: Let me assume that you don't have the cash for paying the penalty and any upfront fees for the new mortgage (valuation, booking fee, what have you - let's say, £1000 in total) - and thus would have to add £7000 to the mortgage, making it £207'000.
The new interest rate would have to be low enough to save you £7000 in ca. 15 months, on a mortgage of 207'000, compared to the current rate on 200'000.
So currently, your daughters are paying £1000 (interest) per month.
In order to save £7000 within 15 months, they would have to save £466.66 per month. That is, with their new mortgage, they must not pay more than £533.33/month or £6400/year (interest).
In order to pay £6400/year on a mortgage of 207'000, the interest rate must be 3.09%.
So if you can find a new mortgage deal at less than 3.09%, with a fee (including valuation) of £1000 or less, then it would be worth it.
However I doubt you will find such a deal. Especially not if you don't have a very low Loan-to-Value. And remember, that would be just to break even - you have not yet made any savings compared to if you just leave everything as it is.
If your daughters intend to put all the monthly savings they get with the lower mortgage straight into a regular savings account, the break-even point would be closer to 3.2%.
Posted on 15 February 2009 |
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1meita has put considerable effort in to answering this question and has come up with in my view the correct conclusion.
Your daughter has locked in to a 6% rate. It may feel like the wrong decision, however this can only be said with hindsight. It could have gone the other way. You probably remember the late 80s -early nineties where locking in to a 6% mortgage would have saved you a huge amount.
However it is fortunately only for two years, which in the grand scale of a 25 year mortgage is not a long time. I would say she should sit back and ride it out and then take a decision on what to do when the 2 years is up.
Posted on 15 February 2009 | Love 0 loves
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824A very good answer from meita, but it only deals with the next 15 months.
Your best chance of a saving would be if the interest rate obtainable now is better than that which would be available in 15 months time when they would need to re-mortgage under the current contract.
Personally, I think interest rates will rise again before then, but others might disagree. If they do re-fix, I would suggest that they go for a longer fix, perhaps 5 years.
I would not recommend a Tracker because I expect interest rates to rise when inflation kicks back in.
Posted on 15 February 2009 | Love 0 loves
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0Mike makes a good point.
The problem I see though, is that longer fixes are quite expensive today. So you are very unlikely to get one that will save you money in the near future (i.e. within the runtime of your original deal). Instead, you would be leaving your current deal, at extra costs, - all for the possibility that deals might be more expensive in 15 months than they are now.
So in effect you would be gambling - let's pay more now, for the sake of being able to lock in to a rate that won't be available any more in 15 months, i.e. for the sake of MAYBE saving in the future.
In the current climate where nobody really knows what's happening and all the experts have been wildly wrong, I would personally not want to gamble anything (pay upfront) on the idea that I know better what's going to happen in the future and will save then ...
I would not bet on future rates high or low, by paying more now. Rather, I would go for what is cheapest now. In times of such high volatility, I prefer the sparrow in the hand to the dove on the roof...
Posted on 16 February 2009 | Love 0 loves
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