compare mortgage renewal period strategies – free calculator
It’s time to remortgage at TFS towers so the recent interest rate drop couldn’t have come at a better time, for this thread of our financial tapestry at least.
I’ve been toying with the idea of going balls out and fixing our mortgage for as long as possible, which seems to be the 10 year mark in this country. I’ve heard of people in the US getting 25 or 30 year fixes at under 3% which just sounds insanely good, but I guess 10 years is long enough for most FIRE types to destroy their mortgage anyway, if that is on their list of things to do 1.
So I created a simple but I think quite useful and eye opening spreadsheet to compare the cost of renewing on a 2 yearly, 3 yearly, 5 yearly and 10 yearly basis.
This makes it easy to see how much we’d be paying for the extra piece of mind of fixing our mortgage for a longer period of 5 or 10 years over the shorter 2 or 3 year periods.
If you want to have a look at the spreadsheet, and copy if for yourself to modify with your own figures, then please click on the following, totally grown up link text:
(And please think of Alan Partridge whilst you do so)
To edit your own version you just go to File -> Make a copy then save it somewhere on your own google drive/docs account 2
how to use the mortgage strategy calculator
All you have to do is fill in the rows that are marked in light green, and the rest is calculated (the interest rate isn’t actually used but I put it in there for ease of reference).
Here is it filled in with some example figures for our case:
Two obvious strategies appear from this simple analysis, you either fix continually for 2 years, always getting the very best rate available, but opening yourself up to any interest rate rises in the future, or you pay some extra potentially unnecessary money for the peace of mind for fixing at 5 or 10 years. I don’t think paying an extra £3,000 for the “piece of mind” for one extra year of fixing with the 3 year over the 2 year makes much sense so that is straight out of the window IMO.
Renewal every two years strategy – As you can see, if we renewed every 2 years, even with the hefty £1499 “arrangement fees” (yea right) this would be the cheapest option… IF, and I can’t emphasise how big an IF that is, mortgage rates do not go up at all. As I can’t predict this, the best I can do is plug the current figures into my calculator and see how much I would have lost out on if the rates do stay this low for 5 or 10 years.
Renewal every five or ten years strategy – If we went for a 5 year fix 3 and rates did end up staying uber low I’d have lost out on nearly £5K. OUCH! And that isn’t including any extra gains I might get from investing the difference. Again, these are both unknown variables whereas the 5 year fix is, well, fixed.
In a similar fashion the 10 year fix could end up costing us £8,624 more
Looking at these figures it seems like quite a big gamble. Would I really stake £8,000 of my hard earned money on interest rates going up significantly (say at least 1.5%*) over the next 10 years? With so many people mortgaged to the eyeballs even a 1% rise would financially kill a lot of people so I think the BoE have got a massive incentive to keep mortgage rates very low for the foreseeable future. On the other hand, 10 years is a bloody long time, and that £8K figure is literally the worst case scenario if mortgage rates do not even go up by 0.25%, which is probably very unlikely.
On balance though, when you put it like this, it doesn’t seem like the peace of mind is worth the price tag to me
*I made a back of the envelope calculation of the 10 year vs 2 year strategy with rates staying low for the first 5 years and then raising by 1% for the final 5 years and the 2 year strategy still came out ahead. So we’d have to see rises of at least 1.5% within about 5 years for the 10 year strategy to win
as usual it’s not all about the money
However there is one other thing playing on my mind and that is actually being able to remortgage every two years.
What if I end up quitting my job and doing something “alternative” for a few years with no real fixed income? I’ve heard the banks don’t really like that as they can’t pigeonhole you into the safe to lend to career boy hole with every other Tom Dick and Harry.
Has anyone else had experience with this, i.e. quitting your job for a while (not fully FI) and then having to go through a remortgage process? The last thing I would want to do is get to the end of the 0.99% 2 year period and end up stuck on the 4%+ SVR as no one else will trust me to remortgage with them!
The other option to consider is go for the 10 year but then direct all excess funds to paying it down aggressively until there is not much capital left to pay so the slightly higher interest rate doesn’t really make much difference (or just pay it all off in the 10 years, if possible). But then you could also do that with the 2 year option anyway, and hope that the lower Loan to Value ratio would make it a lot easier to get a decent remortgage even with lower/sporadic income when the time comes up. Batting the mortgage ball back across the net once again, then you have the opportunity cost of piling that money into house equity rather than using it for potentially more productive activities. Waaaaaah!!! 🙁
As you can see I’m far from making a decision on this so any comments are much appreciated!
Also I hope some people find the calculator/spreadsheet as interesting and useful as I did… it’s just a shame it can’t predict the future of interest rates! 🙂
Notes:
- I’m still unsure of whether it is or not for us, and judging by the huge number of hits on this search it seems a lot of others are in the same boat ↩
- What do you mean you don’t have a google drive!? Are you some sort of Neanderthal 🙂
Erm seriously though if you don’t have one I don’t really know what you would do. Maybe copy paste into Excel? Oh wait I just saw there is a “Download as” section with lot’s of different things so maybe you can download into Excel. How’s this for stream of consciousness style writing by the way? Good? No? OK back to the main post then… ↩
- A quick note on why there is a “5 Years Alt” column, I was looking at going through money back mortgages (no affiliate links, just a happy customer) after securing our initial mortgage with them. Definitely recommended! However it’s still worth looking on line as they aren’t 100% of the market. The only significant one I found cheaper online was the 5 year fix, as you can see there was a difference of ~£1500 so if we go for that option I won’t be using Money Back Mortgages as the will only be giving me a cheque for about £180! Anyway so there is 2 columns for 5 years as one is best online rate and the other was best from MBM, and I thought I’d keep them both in the table just to confuse everyone and have to write this overly long footnote. Gah! ↩
Discussion (15) ¬
I’m self-employed and went travelling, then remortgaged when I got back. Even though I had two years of accounts, and found a decent contract as soon as I got back, this turned into a bit of a nightmare and a mortgage broker eventually got me about 3% above what I would consider a ‘fair’ rate.
So I ended up overpaying about £200 a month for 2 years, which was definitely not worth it. When I remortgaged again I just got the cheapest 5 year fix and left it at that – I’m protected against being over-charged and interest rate rises. Worth it for me.
Hi Owen,
Well you may have just swayed me massively single handedly there!
Thank you so much for chipping in with your experiences, this is exactly the sort of thing I was after…
10 years looks like the likely winner at this stage of the game I think.
Thanks again
Hi TFS,
Interesting to see as always! When we mortgaged a few years ago we ended up for the 5 year fix (10 years just wasnt worth it) – although I didnt expect interest rates to stay as low as they are for as long as they have. We will have to remortgage in a couple of years and have the same thoughts.
In general I wouldnt do the 10 year – a bank is not going to fix something they are going to lose on in general, and normally there is a cap of a 10% of outstanding balance that you can overpay each year, so trying to clear it early would also be a drain on those who are targeting FI soon.
I’d agree 2 vs. 3 years isnt really worth the extra (if they were both the same rate I would probably take 3). Then its the 2 vs 5 years. We took 5 to ensure we settled in and new how our money held up to the scrutiny – now I feel comfortable and knowing I can afford it, I am thinking I will switch to a 2 year fix, and keep changing every couple of years. One thing we will do is keep the repayment amount the same, so if the rate is cheaper we will just reduce the duration.
Hope that helps 🙂
Hi LR,
Great to hear your thoughts as always.
From the analysis above I am thinking either 2 or 10 years.
The way I’m looking at this is if I’m “paying” 5K for the peace of mind for the 5 year fix it makes sense to “pay” only another 3K for an extra 5, no? Also there is a much higher chance of rates going up in 10 as opposed to 5 years (IMO)
Great idea about keeping the repayment the same even if the rate drops, I like your style!
Cheers!
Very thoughtful, TFS. I appreciate there are a lot of variables, and it’s a lot to get your head round. I suppose I see it in a slightly different way, though. We don’t know what’ll happen to interest rates and nor do the banks. This is risk. By fixing, some of that risk is being transferred to the bank, who want extra money by way of insurance. As with all insurance, if you can weather the damage, on average you will do better off not taking it at all. If you take it as read that a fix will cost you more in average circumstances the longer it gets, then you can focus on the decision for what it is, at least in my opinion: a question of psychological risk tolerance.
Hi FS,
I could take the risk of rates rising slightly over 10 years but it is the risk of not being able to remortgage at a decent rate that I don’t like the sound of.
With a 10 year fix I am free, to do what I want, any old time. I do quite like the sound of that. It’s basically paying for some extra freedom, and I’m starting to talk myself round again to that I think. I don’t want to be worried about quitting my job in 1 years time to (say) start a business in case I don’t get my earnings up enough just to get a decent remortgage, that would be uber shite.
Cheers!
I’d guess you’re overthinking this. Worst case is you pay 8k out of 100k more over 10 years. You get something for that 8k – you could take out the mortgage, doss about/do matched betting, whatever, and never have to justify or prove your earnings for 10 years. As long as you could service the debt. Plus you pay 8k more but in 10 years time, when 8k will be worth about half of what it is now
String of two years, you will have to prove a mortgage-worthy salary every two years. That might not fit in with your business, your lifestyle if you are thinking of going it alone.
If I were faced with the choice I’d ignore the nose and focus on how this regular remortgaging fitted in with my intended employment pattern. For me at your age it would have been fine. For you – doesn’t sound like a good fit at all. This looks a much bigger issue than a potential hit of roughly 4-6k in real terms of today in 10 years out of £100k real (real because you were loaned the money right now to buy a house with). At the very least you must deflate your costs year on year to today’s money because the numbers will have been eroded by inflation in 10 year’s time. You’re not comparing like with like otherwise, IMO.
But I don’t thing it’s about the money. It’s about how you fancy proving your steady income every n years. And you have to factor in the risk of eating the SVR.
If interest rates are as low as they are now in 10 years time you will have different problems. What that is saying is that the world has gone into a secular ex-growth phase. I’d pay £8k right here right now to guarantee that not to happen 😉
Hi ermine,
Brilliant comment, as usual you’ve hit the nail on the head!
10 years of worry free (apart from servicing the debt of course) employment structure sounds absolutely right up my alley the way I’m thinking about the near future.
I’m gonna go for the 10 year.
Thanks again ermine and to all the above who helped me come to that decision 🙂
TFS,
Another vote for fixing here. I got my mortgage with a non-working spouse and only one years of accounts. The fees were massive, overpayment is all chargesd at 3% + £75 “admin fee” and the interest is 3.69% (thankfully, only for one more year). I’m now in permanent employment and much more lender-friendly, but I’d seriously look at the benefit of flexibility here, which is what you’re paying for really rather than peace of mind.
If fear of not getting a remortgage and getting stuck with a high rate would put off your FIRE or employment plans, it might be worth looking again. It’s just a matter shifting your financial plans to suitably align with your life plans. Either way, you’re doing great!
Hi Mina,
Thanks for chipping in.
I’m currently in the process of doing the 10 year fix as we speak. Apparently the rate is being pulled tomorrow so hopefully it will all go through OK first time around!
Thanks
Why not consider a lifetime tracker? That seems to be the obvious baseline comparison. IMO 2 year fixes are too short to really protect you from rate rises, and the arrangment fees are every 2 years! Ours is with First Direct, looking online their current rates are 2.24 % for 60% max LTV, that’s the Lifetime Tracker Fee Saver, so no fees. That also solves any future unstable employment at time when your fix ends problem which I think would be an expensive PITA.
We’re happy to have variable rates for now, as our mortgage is quite low and we could easily afford repayments even if rates shot through the roof. If we have kids (so income hit with parental leave, then likely both going p/t after, all following a move to a more expensive house in a better school area), I’ll look at 5/10 year fixes to get us some certainly in a time of reduced income and a much larger mortgage.
Hi Laura,
I’m not really sure I see the point of doing a lifetime tracker at 2.24% (presumably tracks base rate plus 1.99%) which could obviously go up at any time, when I can fix for only 2.49% for 10 years?
Apart from never having to get a mortgage again (assuming you never move or other circumstances change of course) there doesn’t seem to be all that much upside of that arrangement. Obviously what you mention about happy to have variable rate is all good but I already have said kids, am doing said P/T work and Mrs T is on maternity as we speak 🙂 so the certainty you predict you will wish for is what we’re going for now I think.
Thanks again to all for getting the decision clear in my head!