At the end of last week we completed our second remortgage, so I thought this would be a good time to provide some background on our mortgage situation.
In September 2009 my husband and I bought our first house together. We went to an independent financial advisor and decided on a 5-year fixed mortgage at an interest rate of 5.49%. Yes, this was just before mortgage interest rates started dropping.
This original mortgage was for £130,950 over 30 years, on a house valued at around £167,950, so our LTV was around 78%. The price of the house was discounted as there were some major repairs which needed to be completed as a condition of the mortgage, so this meant that for the first year we didn’t do any overpayments as we didn’t have any spare cash. At the end of the first year, we received an annual statement from the mortgage company, saying that we had paid them around £8,000, of which £1,000 had paid off mortgage capital and £7,000 had gone towards interest. This was quite a shock to the system, and for the second year we started making regular overpayments. As interest rates had also dropped considerably during this time, I started looking at whether it would be worth remortgaging to a lower interest rate, although we would have to pay an Early Repayment Charge (ERC) of around £3,500 in order to do so. It turned out that with a lower interest rate, we would be able to reduce the term, thus paying less interest over the lifetime of the mortgage, and also meaning that we would save more in interest over two years than the cost of the ERC. We therefore switched to our first remortgage, for £124,000 over 17 years, at 2.58% (LTV now around 72%).
For the last two years, we have made large overpayments every month, with the aim of overpaying the maximum 10% of the loan amount permitted in our terms and conditions.
As soon as our ERC period for this mortgage was over, we have moved to our second remortgage. This time it is for £85,000 over 4 years at 2.14% interest (LTV now around 47%). On the one hand, for our first remortgage we kept the monthly repayments the same as for the original remortgage whereas for the second remortgage they will more than double, so if either of us loses our job and can’t find a new one within a few months, we will need to negotiate with the bank to extend the term and reduce our payments. On the other hand, the new monthly payments are still less than the amount of monthly payment + overpayment we have been paying for the last year, and will allow us to keep overpaying 10% on this mortgage, so it’s a figure which is feasible.
- If we had stuck with our original mortgage and not made any overpayments, we would currently owe around £122,000 with 26 years to go.
- If we had stuck with our original mortgage and made all the overpayments we have made, we would currently owe around £87,692 with 26 years to go.
- We owe a similar amount now anyway, so this suggests that making overpayments is more important than the interest rate you are on. I am a bit surprised by these results as I had assumed that we would be a lot better off by now from reducing our interest rates…of course, we now have four years to go, or 15 if we had stuck with our first remortgage, instead of 26, so we’re a lot better off in that respect.
If you want to look at making overpayments on your mortgage and how much you could save over your mortgage lifetime, I recommend the Money Saving Expert overpayment calculator. I also recommend this fantastic mortgage spreadsheet by Dave Addey, which has allowed me to play around with interest rates, terms and overpayment amounts to get a very good idea of where I’d end up. Usually it doesn’t turn out to be exactly the same as the mortgage provider’s figure, but it’s generally within a few hundred pounds.