I’ve spent the weekend researching mortgages, which can be best summed up by this
@sevitzdotcom So you can waste rest of your life instead? :P - wompkin
What I have figured out is the following
- The Banks hate you
- The Banks don’t really want you to figure shit out
- The Banks hate the web
- The Banks could make this simply and easy to understand, but don’t.
- The banks have shit websites (except for Cheltenham and Gloucester who just had shit mortgages.
- Mortgage calculators aren’t. (At best they could be called monthly repayment calculators)
- There are too many mortgages products in the market. Most of them have very little difference between them and they just serve to confuse.
What I haven’t figured out is why all the so called money comparison websites haven’t figured this out. Since their ‘role’ is to help you figure out what the best deal is, all they really help you do is “sort by a column”. Anyway, their poor business isn’t my problem. Just seems like a massive wasted opportunity.
To help me figure things out, I’ve put together a simple spreadsheet. Ok it’s not that simple, but really it’s not that hard to do. What I’ve found is that while interest rates are low, for a lot of mortgages, their is very little difference between them. Sometimes less than a few hundred pounds after several years.
The other thing I found is that actually the remortgage fee actually makes more difference sometimes than the interest rate. This is normally added onto the mortgage. This seems to be around £1000 on average but some charge a percentage of the remortgage and this can run up to 5 or more times that.
For example, Lloyds offers three mortgages at (rate/fee)
- 4.19% / £1995
- 4.29% / £995
- 4.79% / £0
Now on my mortgage, .1% translates roughly to about £10. So to beat the higher rate, I’d really need a massively lower rate than what the offer for the additional fee.. The 4.19% is a joke and I can’t see any reason for it except to screw people. I threw all three into my model and it turned out the HIGHEST rate mortgage was the best.
So what did I choose?
Well, the first thing is what are rates going to do. I have some concerns that the economy is unpredictable at the moment (which is different to unstable, but predictable). Everyone (where everyone is friends of mine who’s opinions I trust) reckons rates are going to stay low. Still I modelled both a high rate and a low rate scenario.
However assume rates are going to stay low, but will creep up, you want to maximise as low a rate as possible as soon as possible.
I was originally going to go with the Chelsea fixed rate 4.39% for 5 years. I figured stability beat everything. However this model only plays out if rate shoot up pretty high, and if that’s unlikely then this becomes a less poor choice.
HSBC has a pretty good 2.99% fixed rate mortgage. And their SVR is not bad either (some banks still have massive SVRs). However you need a LTV of 60%, and I reckon I’m probably closer to 65/68%.
Barclays has the best tracker rate at 1.49% so this might be a good one to go onto long term. But to get this you need to fix for 3.89% or 4.19% (depending on your LTV), which isn’t bad, but the real benefits start coming in Y3, and circumstances might have changed by then.
This leaves First Direct with their 1.89% Offset Tracker. Whilst not as good a tracker as Barclays, you can go straight onto it, taking advantages of the low rate immediately. In all different rate calculations this mortgage came out well.
Added advantages are
- No penalty period. So if rates start to shoot up you can switch pretty easily
- It’s an offset mortgage, so you can benefit from money in savings accounts not tying up cash
- You can take additional loans (to pay of unsecured debt) at the same rate.
So all in all seems like quite a winner. I’ll sleep on it a bit, bit that seems to be what I’m going to go for.
If you want to see my modelling I spent the whole weekend doing (note this is not my actual details, I’ve cleansed the spreadsheet somewhat)
Click on the image to get the FULL PDF (this is just a pretty picture extract)
If you want to look at it in more details, you can download it here. It’s a Numbers ‘09 Spreadsheet (and PDF).
Exporting it to Excel sucked and broke half the fields, but if you want it in Excel format to try fix, let me know, and I’ll send it to you.
If anyone has Numbers 09, and want to know how the spreadsheet works let me know and I’ll tell you.
If you’re just looking at the spreadsheet, these were my assumptions
- Interest rate’s averaged for a year, which I treat as unchanged
- Mortgages don’t combine two different variable components (i.e. tracker and SVR)
- I created ‘trackers’ for banks SVRs based on the rate it is now.
- I haven’t stuffed up a major formula or calculation somewhere
All in all, I think Will (Wompkin) was right.
1. Danzor
Convert this to excel and it’s incredibly likely that I might actually use this. Well done.
2. Blue Witch
If you pay higher rate tax, an offset mortgage is a no-brainer, especially when interest rates on savings are so low.
FD are the most flexible of the offset providers. You can repay more when you can, without penalty, you only ever need to pay the interest if you have a lean month, and you can draw-down capital you’ve repaid, should you need it, at the click of a mouse.
One caution though - they are very slow at processing mortgage requests, and the customer service from the mortgage department is not what you’d expect from them (largely because it’s done by HSBC, their parent company, and some is done in India…).
If you do go this route, I’d suggest phoning for an update every couple of days, because they have a tendency to ‘forget’ to arrange vital things. Like the valuation survey. (Info based on the experience of 4 of my contacts over the past 3 years.)
3. Andrew
Could you send me the Excel version?
You make a comment that there “too many mortgages in the market”. Two comments on your comment:
4. Adrian
You are right, I meant mortgage products not mortgages. I’ll amend.
It was slightly tongue in cheek. Going through all the different things on offer, it seemed like their was a lot of mortgages, but not really a lot differentiating which does make it really hard to compare them. I suspect this favours the banks rather than the consumers.
5. Roger
You also need to factor in the opportunity cost of every additional pound you pay to the mortgage company. Or to put that another way, every pound you don’t pay to the mortgage company you should model at getting interest at the long term stock market rate of 11%, less tax. After 5 years, you’ll find you’ve saved up a few pounds which you should then subtract from the mortgage balance.
6. cian
Yup - if you’re building a NPV -like model you need to discount the future outgoings. Not sure what you personal discount rate is though - if you love gambling then it’s like 50% or -100% depending on the moon.
7. Will
Try getting money out of the banks under their new scheme…the one trumpeted by the government to amp up the old small firm guarantee scheme.. We don’t need the money but figured would find out the form from them. Basically, don’t bother. Unless you’re planning to match debt with equity. Erm, what?! Scheme is supposed to facilitate finance, not force you to dilute your equity stake (and then raise debt too!). What a fooken joke!