My 5 year fixed rate is almost up, and I need to decide how to proceed.
Salient facts
I am currently paying 4.99%
When my deal expires I will have 17 years remaining
I have 12% equity (not helped by my house dropping in value by 7% since I bought it.
When my fixed deal expires I will drop on to my mortgage lenders SVR which is 2% above the bank of England base rate
currently base rate = 0.5%, so I would be paying 2.5%
However this rate is due to start rising.
Due to my crappy equity, fixed rate deals on offer to me are in the 6 - 7% range.
I am planning to not change anything, and keep making payments of the same amount I am now, which will be overpayments up to and until the base rate reaches 3%. My thinking is that by paying down the principal, I will be less vulnerable to rate hikes and by increasing my equity I will be eligible for better deals in the future.
I am not keen to spend £1000 arranging a new deal where I will actually have to pay more per month on the mortgage right from the get go. I am also adding money every month to savings, so I would not be totally hosed if the rate goes above 3% as it would initially only affect my ability to save rather than affecting the running of my household.
Does my thinking make sense or are there other angles I need to consider here?
It makes sense to me: keep paying off your current low rate and building equity. In the U.S. mortgages become a lot cheaper when they’re for 80% or less of the home value (in other words having 20% equity/downpayment combined). If that’s true where you are, I’d try and keep paying the low rate at least until you 20% equity because you’ll get much better rates with a refinance at that point. I think it’s unlikely rates will skyrocket any time soon, so there’s not a huge risk in keeping the adjustable rate for now.
Once you get to 20% equity you can look at your rate offers for a refinance then, and decide whether you want to keep rolling the dice with the adjustable or go for a more certain fixed-rate.
[And I say this as someone who would never recommend getting an adjustable rate mortgage if there’s a choice. But given the OP’s position, it seems to make sense to keep paying the low rate for now]
Things to consider:
How often will the rate adjust with the Bank of England changes: monthly? annually?
Is there a maximum amount it can increase any given time? e.g. if you’re paying 2.5%, and it adjusts, can it go up to “sky’s the limit” or is it restricted to 2% or something similar (i.e. this year it can only go to 4.5%, next year to 6.5%).
Is there a maximum amount it can increase at all? Say we get back to the early 1980s where interest rates were 15% or more (in the US anyway): can it go that high?
What would those scenarios do to your payment amounts? At what point might you get priced out of your own home?
Are you planning on staying in the house long-term? If you’re thinking of moving in 3-4 years, then staying with the current loan makes more sense than if you plan on staying there another 17 years. You can do the arithmetic there: what would you pay year 1, year 2, year 3 with the current loan vs with getting a fixed-rate loan.
Prepaying a bit, at least when we last had an adjustable mortgage, DID impact the next adjustment. Which makes sense: the adjusted payment is based on the current principal, amortized over the remaining life of the loan. So if we owed 150,000 on the place with 25 years left, then the next year we owed 145,000 with 24 years left, the bank would recalculate the payment based on 145,000 over the remaining 24 years of the loan. If instead we only owed 140,000 because of prepaying, the payment would be a bit lower.
To be sure of that, however, you’ll need to read the paperwork from when you took out the loan; it should spell that all out.
And of course prepaying a bit gets you that much closer to having whatever equity percentage you need for better financing choices.
Stay on the SVR but make sure to bank the savings you’re about to make. Every few months (or every month if you’re keen) use them to overpay the mortgage. Check your term but generally you can overpay up to 10% of the balance without penalty and it makes a huge difference.
Rates are going to go up of course but fixed rates already have that factored in to an extent.
What I am planning to do is set my payments at their current level, so that when I am on a rate lower than 4.99% I will automatically be overpaying. This overpayment will be eroded as bank base rate approaches 3% and if it goes above I need to pay more just to maintain normal payments.
You’ll have to set that up with your lender as the payments will automatically drop when the new rate starts. They should be happy enough as most lenders want better LTV accounts on their books to reduce their own exposure as we enter 2011 which will be worse for them than 2010.
Depends on how their system is set up though, you may still need to keep amending it as rates change.
Here’s the tip: I know a guy who runs a mortgage scheme that works on overpayments. What he does is negotiates with the mortgage company to take an annual rather than a monthly payment (not all of them say yes). Then he gets the client to pay into a high-interest savings account, with overpayments too. All the money earns interest then gets flushed into the mortgage account at the end of the year - he adjusts it so that the overpayment + interest ensures that the scheme knocks at least 10 years off the mortgage term.
I would imagine that the banks might not negotiate that kind of a deal with an individual, but it may be worth asking. Even if it isn’t, though, instead of overpaying every month you could chuck what you would have overpaid into a high-interest fixed term no-withdrawal account (e.g. five years), then flush that + its interest into the mortgage at the end of the fixed number of years. It might have a wee beneficial effect, particularly if you can snag something like the HSBC fixed-term 10% guaranteed account they’re running at the moment - that’s quite a disparity between what the money would earn vs what it would save you in repayment off the mortgage.
Now my question: I’m in a very similar situation to you; my C&G fixed-rate term, fixed at more than 5%, ends in May. You said “When my fixed deal expires I will drop on to my mortgage lenders SVR which is 2% above the bank of England base rate” - do you know if dropping to the lender’s SVR is a standard practice among lenders? In other words, is that what’s likely to happen to me?
I’m not the OP, but went through exactly the same thing in July when we came out of fixed rate (we decided to stick with the SVR for a while and keep an eye on interest rates, after investigation). To answer your question, I suspect you should double check with your own lender, but my research said this is exactly standard practice. Unless you talk to them and arrange something new, for which you’ll probably have to pay some arrangement/maybe even valuation fees unless they’ve got some deal or other, you’ll drop onto the standard rate. The sooner you talk to them the better your options are likely to be.
To the OP - makes sense to me, it’s what I would do in your situation. The only thing I would add is to make sure that your overpayments do not exceed any limit on overpayments set by your mortgage company - some only allow you to overpay by (say) 10% every year. If you breach that, you could incur unnecessary charges, so put any excess in a savings account instead, if necessary.
To jjimm - I agree with Charley, I think it’s standard practice but check with your lender.
Jjimm - I am with Nationwide. Because I got my mortgage before some cut off date in 2009, I revert to the SVR 2% above base rate. People with Nationwide who got their mortgage after the cutoff date will revert to the BMR which is, i believe, 4%.
The only way to be sure what will happen in your case is to read the fine print or to speak to your provider.
Dropping to the SVR is more likely than not what will happen but not always. My fixed term ended last year and it reverted to a lifetime tracker at 1% above base (woop!). The only way to know for yourself is to check with the lender or your key facts document if you still have it.
In any case you’ll certainly drop to some variable rate which will likely be lower than what you’re paying at the moment (until rates rise).
If you want to let us know the lender and mortgage name we may be able to tell you.
Thanks for all the advice. And sorry to hijack Wanderer’s thread…
Unfortunately C&G won’t talk to me AT ALL without my mortgage acc. no., and I’ve left that at home today so I’ll have to wait until Monday.
The reason I am wondering is that I expected to be fucked over, but dropping to the SVR would actually save me a couple of hundred squid a month at the moment. And the reason I expect to be fucked over is a) that mortgage companies are bastards, and b) when I took out the mortgage I was married and we had a reasonable combined income. Though the mortgage is still in both of our names, my ex wife now has no income and I only just have enough to make payments, so any renegotiation would only take my current salary into account.
Per C&G’s “what mortgage can you get?” calculator on their website the calculator tells me in current circumstances I’d only be able to get 60% of the outstanding 77% of the house’s value still borrowed.
Crossing my fingers that the company just shifts my account to SVR if I don’t do anything about it…
With C&G it depends when you took the mortgage out. If it was pre-2007 (don’t know the exact date may well be 2008) or so you’ll go onto their SVR. When rates started falling a number of banks started introducing new variable rates which were higher to increase their margins. C&G were one of the first to do it. So if you’ve only taken out he mortgage in the past few years you’ll not go onto the SVR but instead go onto the HVR (all the lenders are calling these new rates different things, C&Gs is called the Homeowner Variable Rate).
The HVR is 3.49% above base compared to the SVR on old mortages of 2.5% above base.
gonna be £120 / month for me. Which I don’t quite understand as the interest payments will drop by about £190.
I went to thisismoney.co.uk and in my excel mortgage model I have included their projected rate rise to 0.75 in October, 1 in January and 1.5 in April. All guesswork of course, but it helps me to see what to expect regarding payments as the rate changes.
It’s because they’ve rebalanced the repayments so that you’re paying your new, lower payments over the remaining years.
As your previous repayments were higher, towards the end of the repayment schedule you’d be paying large chunks off the principal. With the new smaller payments you’ll be paying off less principal towards the end and so need to pay off more now.
