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    comparison between mortgages

    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?

    9 Comments

    option 2 - £668 More in payments over the two years but you didn't have to pay the £999 and balance outstanding is less after two years too..

    Agree, don't understand what the benefits of deals with fees are?!?

    if the difference in interest rates was greater then due to the amount of mortgage you're taking it may have been 'cost effective'. another factor to take into account is whether you would be adding the fee on or paying it up front. adding it on means you pay interest for however long you have the mortgage for. in this case as there is only 0.3% difference then it doesn't make it cost effective so option 2 is better.

    benefits 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.

    As the above answer. There will be a break even point when option 1 will be more attractive than option 2as the loan amount increases.
    Edited by: "mutley1" 11th Jun

    Original Poster

    Many thanks for your responses. Option 2 it is.

    hi guys, just trying to understand this...

    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

    Original Poster

    ardypats

    hi guys, just trying to understand this...I would have assumed that … hi guys, just trying to understand this...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.

    Original Poster

    In order to further clarify and help anyone who may be in a similar situation below is what I concluded:

    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" 15th Jun

    have you got the esis?
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