Switching mortgage advice

[brussels]

Hi,

I currently have 6 months left on a fixed term with nationwide building society at 4.89%. I am aware that I have around £500 early repayment charges if I switch before the end of the term in June 2011.

Nationwide have two variable rates: a BMR (2.5%) and SMR (3.99%).

The BMR (only availbale to certain customers) is guaranteed not to be more than 2% above bank base rates. Whereas, a 3 year fixed rate at 4.09% with no product fee is an alterntaive to me.

My mortagage is £74,000.

If base rates remain as they are for the next three years, I have paid 4.47% less interest (3 x 1.59) in that time rather than taking the fixed rate of . This , I believe is £3,529 pounds less (not sure if I have calculated correctly)

Therefore, even if base rates go up in two years, I would be around £2,300 better off to compensate for the extra increase.

To me, it seems wise to go with the BMR rate of 2.5% and hope that there is not a massive hike in the base rate over the next two years.

Does anyone agree that I should go with a variable rate? Or am I missing something?

Thanks for responses.

[IFA]

What happens to your mortgage if you simply leave it until June 2011?

Do you then revert to BMR automatically at that time?

If so then transferring to the BMR straight away will cost you £500 for just a few month's reduction in your monthly repayment (and interest charges) because from June onwards your situation will be no different to where it would have been anyway if you had left things alone. Changing could save you around £884 in interest over 6 months, so after paying the £500 fee (and any other charges that may apply) you might have a slight advantage if the change over process is very quick and if the variable rate doesn't rise in the meantime.

With regards to the decision on taking a fixed rather than a variable rate, if the interest on your mortgage is calculated daily or monthly then the question to ask is: "Will the bank base rate be higher or lower than 2.09% on average over the next three years?". If it is then you will pay more interest over the next 3 years on the variable rate, if it isn't then you will pay more interest on the fixed rate.

This is something that nobody can tell you with any kind of certainty, you just have to go with your own intuition but it is worth remembering that 2.09% is just 1.59% rise from where we are now. To put that into perspective; when the base rate dropped most recently it fell from 5.75% to it's current rate of 0.5% in just 16 months between December 2007 and March 2009.

It is therefore not impossible for the rate to change rapidly over a short period of time and it could theoretically rise as quickly as it fell (although most think this is unlikely but the longer the bank leaves it before the coming rises begin the quicker it is likely to happen when it finally does), and a rise of 1.59% (or more) could happen in a short space of time.

[brussels]

Thanks for the detailed reply.

I suppose it comes down to whether or not I want certainty over how much my mortgage will be over three years. As you mention, interest rates could quicky rise.

Thanks ever so much.

[IFA]

Absolutely, that's the crux of it.

A fixed rate will guarantee your payments, a variable rate will not.

Either way it's a gamble because you cannot predict the future so one way or the other you could lose out whichever you choose.

[Sean Hughes]

That is great advice from IFA

If you are considering a variable rate which tracks Base Rate:

You may want to visit the Bank of England's website where you can find a history of the Bank of England Base Rate's movements. This will give you some idea of how rates have moved in the past.

You can use a Mortgage calculator to project what your Mortgage repayments will be a different rates. By doing this you can work out what the Base Rate would have to go to in order for you to find it difficult to keep up with your Mortgage repayments

You may also want to do a little research in regards to the factors the Bank of England's Monetary Policy Committee consider when deciding what the rate should be. By doing this you will be in a better position to consider whether rates are likely to go up, down or stay the same

hope this helps

[brussels]

Thanks for your replies.

[wayne]

Originally Posted by IFA

What happens to your mortgage if you simply leave it until June 2011?

Do you then revert to BMR automatically at that time?

If so then transferring to the BMR straight away will cost you £500 for just a few month's reduction in your monthly repayment (and interest charges) because from June onwards your situation will be no different to where it would have been anyway if you had left things alone. Changing could save you around £884 in interest over 6 months, so after paying the £500 fee (and any other charges that may apply) you might have a slight advantage if the change over process is very quick and if the variable rate doesn't rise in the meantime.

With regards to the decision on taking a fixed rather than a variable rate, if the interest on your mortgage is calculated daily or monthly then the question to ask is: "Will the bank base rate be higher or lower than 2.09% on average over the next three years?". If it is then you will pay more interest over the next 3 years on the variable rate, if it isn't then you will pay more interest on the fixed rate.

This is something that nobody can tell you with any kind of certainty, you just have to go with your own intuition but it is worth remembering that 2.09% is just 1.59% rise from where we are now. To put that into perspective; when the base rate dropped most recently it fell from 5.75% to it's current rate of 0.5% in just 16 months between December 2007 and March 2009.

It is therefore not impossible for the rate to change rapidly over a short period of time and it could theoretically rise as quickly as it fell (although most think this is unlikely but the longer the bank leaves it before the coming rises begin the quicker it is likely to happen when it finally does), and a rise of 1.59% (or more) could happen in a short space of time.

Really great post.
It is really informative for the person who wants to know about Mortgage switching.
I like the way you explain the things..
Keep posting.........
Thanks.

[jannypan]

I suppose it comes down to whether or not I want certainty over how much my mortgage will be over three years. As you mention, interest rates could quicky rise.

[UK Mortgage Broker]

I totally agree with IFA's post above