Mortgage Dilemma - Fresh Eyes/Brain Needed...

[BRISTOL86]

Hi Folks

Driving myself mad with a dilemma about a remortgage and need some fresh eyes/thoughts on it. I don't really I have anyone I can go and talk to about these things so bear with me (special thanks to Sarnie for putting up with my endless questions!)

As an introduction to set the scene - we purchased our first house this time last year at 95% LTV. 2 year fix, so remortgage without penalty in one years time. Things were ticking along as per the plan, house prices steadily risen since we purchased and looking like we'd be able to get off of a 95% product this time next year and onto 90% or even 85% if we could save a bit of cash over the next year to augment any equity gain.

Now of course I'm panicking about the implications of the vote and my worry is that in a year's time we will have to remortgage at 95% again or even worse effectively get stuck on our mortgage we are on at the moment after the 2 year introductory rate is over, should we be in negative equity (current rate 4.79%, will rise to at least 5.79% if we get stuck on it in twelve months time....)

I put some numbers together (thanks again Sarnie!) to illustrate the position in one and two years between staying with my current mortgage and remortgaging now onto a 90%LTV product.

So based on the below, in year 1 there is nothing in it from a cash flow point of view - what it costs me in fees, I save on repayments almost to the pound. Happy enough. Year 2 is where it gets interesting - I've assumed worst case to show the difference between getting stranded on my 5.79% variable rate and the second year of the new mortgage (fixed at 2.45%).

What I draw from this is that over the next 2 years, should the worst happen, not only have I saved nearly £5.6k in cash, but my outstanding mortgage balance is reduced by £4.4k - so a net 'gain' of £10k.

As I say - the year two figures for the current mortgage are worst case (assuming I get stuck on my existing mortgage - ie negative or nil equity position) so this is highly speculative, but even in the best case I can't see that I have a lot to lose by playing the safe option now? Getting onto a 90% product ASAP seems to be a no brainer to me (in the back of my head I am bearing in mind the fact that we want to start a family in the coming few years.....) I can't stress enough how getting stuck with my current mortgage after the fixed term ends would throw those plans into oblivion!

But part of me thinks I must be missing something. Can someone offer their outside view of the situation?

[Myc]

Have you checked the small print on your current mortgage?

I have a two year fixed rate and face big penalties if I settle the mortgage within that time period.

You may find the saving you talk about will be largely swallowed up by fees to your current lender so I would recommend checking before going any further.

[BRISTOL86]

Myc said:

Have you checked the small print on your current mortgage?

I have a two year fixed rate and face big penalties if I settle the mortgage within that time period.

You may find the saving you talk about will be largely swallowed up by fees to your current lender so I would recommend checking before going any further.

Yeah the ERC is built into the calculations above.

[rsbmw]

My opinion is that for the timescale you are talking about, there is more likely to be a supply issue than a fall in value as builders struggle. We're also more likely to see a base rate cut in response to recession (in the short term). Personally I'd sit tight, however the erc'a for your product don't look too bad so if you can get a long enough fix at a decent rate and you are most concerned about affordability, it's probably worth doing.

[BRISTOL86]

rsbmw said:

My opinion is that for the timescale you are talking about, there is more likely to be a supply issue than a fall in value as builders struggle. We're also more likely to see a base rate cut in response to recession (in the short term). Personally I'd sit tight, however the erc'a for your product don't look too bad so if you can get a long enough fix at a decent rate and you are most concerned about affordability, it's probably worth doing.

The affordability is the key here - we have no affordability issues whatsoever at the moment, but should we lose a salary at the same time as (worst case) a large hike in mortgage payment.

All crystal ball stuff I know but my inherent risk averse nature thinks it might be worth going for the safe option now even if in the grand scheme of things I'm no better off in the long run.

Based on the figures above I can't see how I can be worse off in the long run? Unless of course prices soar and i could potentially get even lower than 90% in 12m time but the difference between 90% and 85% is tiny compared with the difference between 95% and 90%...

[rsbmw]

You're taking quite a short term view of a 25 year debt committment. I would advise against paying 2.5k to exit a 2 year fix 1 year in, just to jump into another 2 year fix and simply offset the problem 12 months. I think at that point you will be more at risk of base rate rises and a market correction than you would be over the next 12 months, and from the sounds of things that's the point at which you would have a young child and lower income. Jumping into a 5 year fix at 90% LTV would seem a sensible move for you, not clear from the above what product the 2.45% interest rate is for.

[BRISTOL86]

rsbmw said:

You're taking quite a short term view of a 25 year debt committment. I would advise against paying 2.5k to exit a 2 year fix 1 year in, just to jump into another 2 year fix and simply offset the problem 12 months. I think at that point you will be more at risk of base rate rises and a market correction than you would be over the next 12 months, and from the sounds of things you that's the point at which you would have a young child and lower income. Jumping into a 5 year fix at 90% LTV would seem a sensible move for you, not clear from the above what product the 2.45% interest rate is for.

Thanks for that. I think the 2.5k is largely an irrelevance as the saving per month in that year one is £307 - £3.7k which covers the ERC and the new mortgage fee. So the cash position in the next 12 months is the same regardless.

It all comes down to the likelihood of me not being able to get off of a 90% product in one years time. I have no idea whether I will be able to or not (I guess no one does without a crystal ball!)

I'll look into the numbers on a 5 yr fix - that would at least give me some security over a crucial period in our lives financially...

[rsbmw]

BRISTOL86 said:

I'll look into the numbers on a 5 yr fix - that would at least give me some security over a crucial period in our lives financially...

Which does seem to be the point! 5 year fix can be had for around 3% at 90% LTV, so should still reach just about break even after a year.

Bear in mind if your additional equity is primarily coming from a rise in value of the property, a mortgage company valuer may not see the value the same way as you do, especially after only a year.

[rsbmw]

Just to add, for what it's worth if young people like yourselves who bought at 95% LTV (help to buy?) in the last year or so can't remortgage or afford to keep paying your existing mortgage as your deals expire, we're all fked anyway! Can't see "them" letting that happen.

[BRISTOL86]

rsbmw said:

Just to add, for what it's worth if young people like yourselves who bought at 95% LTV (help to buy?) in the last year or so can't remortgage or afford to keep paying your existing mortgage as your deals expire, we're all fked anyway! Can't see "them" letting that happen.

It's definitely not a 'can't afford to make payments' scenario - we are currently in a position where we can save/overpay £1k a month from now onwards (would be more with a better LTV and thus lower payment) - I'm just naturally cautious and drive myself mad at the thought of the worst case scenario....being stuck on this 95% mortgage is my worst nightmare.

We purchase earlier than intended hence the low deposit (not help to buy just a standard 95% mortgage) because we found a house we liked where everything was brand new (bathroom/kitchen/Windows/heating/flooring etc) and nothing will need doing for 10 years. But obviously that means we're that much more sensitive to market fluctuations. Removing some of that uncertainty would make me sleep easier!

[BRISTOL86]

Ok so switching to a 5 year fix now at ~3% would cost me roughly £600 in the coming 12 months (difference between penalty payable and saving on repayment) however this would reduce my outstanding balance by nearly 3 x that in the same period. It would then give security for the next 4 years of my life which will probably be the most financially sensitive.

Is there a good reason NOT to do this (other than the obvious fact that prices might not fall and I might be locked in at a less than favourable rate for 4yrs) - note the 'less than favourable' rate is still pushing on for 2% lower than I'm currently paying ?

[rsbmw]

The argument for not doing it would be it saves you £600 over 12 months, and potentially more if rates drop further/you save up more and you could have fixed at a lower rate. I don't believe the amounts involved are so high that you would seriously regret it, especially are you are more interested in securing your outgoings (which is why fixes exist in the first place). As long as you wouldn't look back in a few years and regret the decision as you may have saved a couple of grand by not doing so, I say go for it.

[BRISTOL86]

rsbmw said:

The argument for not doing it would be it saves you £600 over 12 months, and potentially more if rates drop further/you save up more and you could have fixed at a lower rate. I don't believe the amounts involved are so high that you would seriously regret it, especially are you are more interested in securing your outgoings (which is why fixes exist in the first place). As long as you wouldn't look back in a few years and regret the decision as you may have saved a couple of grand by not doing so, I say go for it.

With the outstanding balance being reduced by 3x the Y1 outlay I'm chilled about that.

You're right of course about rates dropping further, but as you say the trade off would be the peace of mind that comes with knowing exactly what your outgoings are for a longer period.

[Sir Bagalot]

If you do do it then leave your monthly payment at £1,120. That way you start overpaying, and thats good

[BRISTOL86]

Sir Bagalot said:

If you do do it then leave your monthly payment at £1,120. That way you start overpaying, and thats good

Yeah I'm hoping we'd be able to make decent overpayments during the 5 year term.

[dub16v]

Was in a similar position a year or so ago (but at 90%LTV).

We remortaged with another lender, revalued the property (to get LTV down) and fixed for five years. Currently paying the same amount per month as before which knocks ~5 years off the mortgage term.

Fix low and long in my opinion, too much uncertainty.