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I am planning to apply for one of Santander mortgages for £220,000. There are two options (both are fixed rates for 2 years): Option 1: 1.34% with £999 fees (added to the loan), then 4.49% SVR. Op… Read More

I am planning to apply for one of Santander mortgages for £220,000.

There are two options (both are fixed rates for 2 years):

Option 1: 1.34% with £999 fees (added to the loan), then 4.49% SVR.

Option 2: 1.64% with no fees, then 4.49% SVR.

As per moneysavingexpert comparison results, I get the following figures:

Option 1: Monthly 'fixed' payment is £746 with a cost over 2 years of £17,905 (Remaining mortgage at end of 2 years: £208,869)

Option 2: Monthly 'fixed' payment is £774 with a cost over 2 years of £18,573 (Remaining mortgage at end of 2 years: £208,452)

So which option is really better over the two years? The first option where I pay less but the remaining mortgage is higher or the second option where I pay more but the mortgage remaining is less?

There are two options (both are fixed rates for 2 years):

Option 1: 1.34% with £999 fees (added to the loan), then 4.49% SVR.

Option 2: 1.64% with no fees, then 4.49% SVR.

As per moneysavingexpert comparison results, I get the following figures:

Option 1: Monthly 'fixed' payment is £746 with a cost over 2 years of £17,905 (Remaining mortgage at end of 2 years: £208,869)

Option 2: Monthly 'fixed' payment is £774 with a cost over 2 years of £18,573 (Remaining mortgage at end of 2 years: £208,452)

So which option is really better over the two years? The first option where I pay less but the remaining mortgage is higher or the second option where I pay more but the mortgage remaining is less?

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(9) Jump to unreadPost an answerbenefits of fee paying deals is that they offer a lower rate of interest, if you have a large mortgage, pay it up front and the deal is longer (say 5yr fixed) it can potentially save thousands.

I would have assumed that option 1 is the better deal; over the 2 years you would pay £28/month less, resulting in the cost over the 2 yr term being £668 less. On the other side (remaining mortgage balance), you owe £417 MORE. Given that you pay less over the term than you owe back, wouldn't option 1 be cheaper by £251 over the 2 years?

Is my logic flawed here? Not trying to be obstructive, just want to know where I'm going wrong!

Thanks

I would have assumed that option 1 is the better deal; over the 2 years you would pay £28/month less, resulting in the cost over the 2 yr term being £668 less. On the other side (remaining mortgage balance), you owe £417 MORE. Given that you pay less over the term than you owe back, wouldn't option 1 be cheaper by £251 over the 2 years?

Is my logic flawed here? Not trying to be obstructive, just want to know where I'm going wrong!

Thanks

It is a perfectly valid question, as I too initially thought that option 1 will be cheaper.

First of all the mortgage interest is not a straight forward simple calculation.

I think it is called amortization with scheduled payments(using a formula), where the amount of each payment applied towards principal grows while the amount of accrued interest decreases over time. So initially higher amount goes towards interest (lower towards principal) and later on lower towards interest (higher towards principal).

To keep things simple, if we were to take out the fee from the equation then obviously option 1 would be better. However adding the fee separately with its approx interest (999 for 2 years at 1.34% gives a total of approx £1026 with interest) paid over 2 years. Now if we were to add that to the figures then:

Option 1: Monthly 'fixed' payment is £743 + £43 with a cost over 2 years of £18,850 (Remaining mortgage at end of 2 years: ££207,925)

Option 2: Monthly 'fixed' payment is £774 with a cost over 2 years of £18,573 (Remaining mortgage at end of 2 years: £208,452)

I do not know the exact formula but the following spreadsheet may help if you are willing to explore further.

For the two options to be compared fairly/like for like, we have to consider the fees over a two year period and not over the whole life of mortgage. So we can first calculate figures for the two options (i.e. without fees) and then add the fee separately to option 1 as if we are paying the fee over a two year period (along with interest).

All in all when I calculated I found option 1 to be £267 worse off.

Edited By: AstalaVista on Jun 15, 2017 09:25