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! 🙂
- 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! ↩