Mortgages : input needed please.

[joglynne]

My knowledge is somewhat outdated so I would be very grateful if someone could give their opinion on the following two mortgages both with the Darlington BS. The choice is definitely between these 2 options, so the question is which would you go for and why.

The person buying the house is a young ... ish first time buyer and the house will need a new roof so keeping some of his capital in reserve is also a factor.

Option 1. ....A Tracker ... 2 year rate at 2.75% over base rate (currently 0.5%) It come with an arrangement fee of £1200 but the valuation survey would be free.

Option 2. ....3 year fixed rate at 4.34%. Again this comes with an arrangement fee of £1200 but an additional £245 would need to be paid towards the valuation.

Based on repaying the loan over 25 years the Tracker would cost £584 pm and the Fixed rate would cost £656.

Don't let me down guys I have been bragging how helpful you are on everything under the sun.

[Angua]

What you need to examine very carefully is the percentage above base that the tracker is pegged to. Then look at the rate above base the fixed term would revert to once the three years has expired.

Finally you need to be a real second guesser as if the base rate rises to 2.5% within the next couple of years, the fixed rate would be beneficial and you would know exactly what is due each month.

The other thing is you may very well get a much better deal elsewhere. Also worth checking switching costs for the future.

May well be worth finding a decent mortgage broker as they will do all the leg work & you have an extra layer of protection. All at no cost to you.

[joglynne]

Hi Angua, thanks for the quick response.

You have put your finger on his quandary. (That sounds like a line MrLM would pick up on )

..... Just what is the base rate going to do over the next 2/3 years.

Pete has got a Mortgage Advisor and done a lot of Googling/comparisons to back up his advisor's recommendations that the Darlington is the best choice. The position he will be in at the end of these fixed periods has also been looked at so the only thing left to decide, unless someone here throws a spanner in the works, is which option to choose.

[danielf]

If he's got spare cash, he might want to consider a mortgage with an offset account. Deposit any cash you have in the offset account, and you don't pay interest on that sum. This effectively gives you interest at the rate you pay for the mortgage which will be more than you'd get if you were to put it in a savings account. Plus, you don't pay tax on the interest.

[Angua]

As our mortgage broker said to us. "Do you want security (fixed rate) or a lower cost with risk of rises (tracker)".

If it is really important to know that outgoings will be stable for 3 years then the fixed is the best bet. If not the tracker is better.

You do need to be very financially disciplined to run an off set mortgage cost effectively.

[Flyboy]

What balance is he borrowing and what is the loan to value? What is Darlington's current variable rate?

I am also a little confused about the repayments. How is the tracker's repayments, at 5%, less than the fixed, at 4.35%?

EDIT: Just calculated it. He is borrowing £118750. The fixed rate is 4.35% and the tracker is actually 3.25%

[danielf]

Originally Posted by Angua

You do need to be very financially disciplined to run an off set mortgage cost effectively.

What do you mean? Do you mean you shouldn't take the money out?

[joglynne]

Originally Posted by danielf

If he's got spare cash, he might want to consider a mortgage with an offset account. Deposit any cash you have in the offset account, and you don't pay interest on that sum. This effectively gives you interest at the rate you pay for the mortgage which will be more than you'd get if you were to put it in a savings account. Plus, you don't pay tax on the interest.

Thanks for the reply danielf. The only usable spare cash that Pete has is deposited in the Bank of Mum and Dad at 0% interest. Good suggestion though. It's something he could consider in the future if he decides to move his mortgage. :TU:

Sorry Pete, I know you don't think about us like that.

---------- Post added at 12:41 ---------- Previous post was at 12:38 ----------

Originally Posted by Flyboy

What balance is he borrowing and what is the loan to value? What is Darlington's current variable rate?

He is borrowing £120,000 and the rates are :- Tracker ... 2 year rate at 2.75% over base rate (currently .5%) and ... 3 year fixed rate at 4.34%.

I am also a little confused about the repayments. How is the tracker's repayments, at 5%, less than the fixed, at 4.35%?
__________________

Fixed is as I said at 4.34% Tracker is 2.75% + 0.5% (=3.25%) Sorry for any missing decimal point. Base rate at 5% would have us running for the hills.

[Flyboy]

What is the borrower's short term plan? Is he likely to move again in the next three to five years?

---------- Post added at 12:51 ---------- Previous post was at 12:48 ----------

Originally Posted by joglynne

He is borrowing £120,000 and the rates are :- Tracker ... 2 year rate at 2.75% over base rate (currently .5%) and ... 3 year fixed rate at 4.34%.



Fixed is as I said at 4.34% Tracker is 2.75% + .50% (=3.25%)

Sorry Joglynne, in your OP you wrote that the rate was five per cent. I thought someone at the Darlington was trying to pull the wool over his eyes.

[Angua]

Originally Posted by danielf

What do you mean? Do you mean you shouldn't take the money out?

Colleague has an offset and is very disciplined. Currently has (after less than 10 years) £20k savings and only £20K or so left to pay. Chooses to keep the savings at the moment as they are making improvements to the house.

[joglynne]

My fault Flyboy, I have amended my post. 5% base rate. <cold shivers >

Pete is unlikely to move in the next 5 years unless his firm decide that he has to work out of London. Should that happen it will be easy to rent out and probably be kept by him as an investment property.

[Flyboy]

I had always advised clients in the past that they should consider what their attitude to risk is. If their nature is to avoid risk, then the fixed rate is probably the way to go, as this provides stability and makes it easier to plan for the short to medium term. If they are not adverse to taking risks and they are comfortable with assuming that the base rate will not exceed, in this case, an average of 1.84%, they may wish to consider the tracker.

The other thing to consider is that by taking the tracker he will pay nine thousand pounds more, over the three years, if he stays on the variable rate. He will have to take the risk that there will, or will not, be a comparable product available in two years time. Interest rates tend to rise after a general election (the incumbents thinking they have nothing to lose), so the chances of having a low rate product is less.

Now, the most important thing to look at is the society's product itself, without having done a full market comparison, I think the arrangement fee of twelve hundred pounds is a bit excessive. How much research has he done? For example, First Direct is offering a tracker product at 1.89% above base rate, for the whole of the mortgage term and the arrangement fee is nine hundred and ninety-nine pounds. ING are offering a three year fixed rate at 4.29% with a fee of seven hundred and ninety-five pounds.

[joglynne]

@ Flyboy. Lots of research. The arrangement fee is acceptable when compared to other Mortgage lenders and taking the rates available into account. Pete is in the enviable position of having his firm, pay for the services of his Mortgage Advisor who because he gets no money back from the lender is completely unbiased in his recommendations.

[Flyboy]

Then why has he not considered other, less expensive alternatives? I would not be absolutely certain as to the broker's independence. I got these examples by looking at a comparison site for three minutes, I haven't even started to look at industry sources.

What is the loan to value?

[joglynne]

The advisor is independent. I know this for certain but couldn't explain how on the open forum as I would be giving away confidential information.

Could you give links to the better examples you mention.