Stuck in a bad fixed-term mortgage? What can I do?

[Doodlebug89]

Hi everyone,

I bought my first house with my husband in Summer 2015. We went for a 5 year fixed mortgage for various reasons, I was concerned about the upcoming Brexit vote and potential economic uncertainty in the UK, and I was on a probationary period at work (completed last year) and wanted the reassurance of a fixed mortgage payment each month.

However, I now realise this was the wrong decision. Our fixed rate is 3.99. So last year we paid approx £6,500 interest on a £163,800 loan, and only paid off £2,400 from the actual loan! Our mortgage payment is £735 per month which is very affordable.

There is a huge penalty if we leave (it was £10,000 although it's going down so now £4,800).

Is this a really bad rate? Is there anything we can do? We could aim to overpay by say £3-5k a year if we really really cut back, although DH needs convincing that this is a good idea.

It's our first house so we didn't really know what we were doing!

Just checked my mortgage agreement, and it says "a capital reduction of 10% per annum can be made without incurring an early repayment charge"

It's no good picking a fixed rate to save money long term. You may, you u may not. The point of the fix is to give you security for the term of the fix. We have nearly always fixed and we've had a mortgage 19 years. If we worked it out it's most likely cost us more but the security the fix gives is worth that cost for us.
Our rate runs out this year and we've just picked a new rate of 2.29. Our old rate was 3.79, fixed in 2013, and that was quite a bit less than the rate we had in 2008. Our first fixed rate in 2008 was 6.5 I think!
Tbh if your pay,net us affordable I would forget about it till 2020. You would gave yo pay the penalty if you change now and on a mortgage that size you won't save enough to make it worthwhile. Chances are rates are going up later this year so you can be smug about being secure in your situation for another two years whilst everybody you know on variable rates starts complaining.

You’ve only got 3 years of your fixed period left, so your best option is to try to overpay whatever you can afford between now and then, to increase your equity, so that when you go for your next mortgage deal you can hopefully get into the next ‘bracket’ in terms of Loan To Value, which will get you a better interest rate. 3.99% is not bad for a first mortgage, just do what you can to get yourselves in a good position for when the end of the fixed rate runs out. And bear in mind inter st rates could go up between now and then, so you might not get a lower rate then anyway. And you always pay more interest at the start anyway, that’s how mortgages work.

At the beginning of a mortgage you always pay far more interest than capital, that shifts gradually through the (usually) 25 year term so that in the last 5 years you are mainly paying capital. You possibly could have got a cheaper rate, but possibly not for such a long period and with a small amount of equity you probably have and it’s always a bit of a gamble on what interest rates are likely to do. If they had shot up you would have been happy! If you can afford to keep paying it then just carry on to the end of the 5 years- You can always save some money separately to pay off a chunk when you next remortgage.
My first mortgage had a 15.4% interest rate, so the current rates are tiny, also the tiny house we had still cost several times our annual income, before anyone starts saying houses were cheaper then -they were but our wages were also minuscule to match and 65% of our joint take home pay was taken by the mortgage on a 1 bedroom house. It was worth it long term but extremely painful at the time.

Umm, that's how mortgages work... In the early years most of the payment does go on interest. You will have been given a KFI document which shows how this changes over the term of the mortgage, every month a little less of the payment goes on interest & a little more on capital repayment.

3.99% isn't the best rate around but if you don't have great credit records and/or had a low deposit, then it's not that bad a rate.

This calculator will do the calculations to tell you if you could pay less in total by paying the £4,800 fee to remortgage to a better rate.

If you make overpayments to cut the term of your mortgage, then you will pay less overall. But you will still find that for the next few years, the majority of your monthly payment will go in interest.

I feel your pain we took out a ten year fix a year before the rates crashed. Its par for the course unfortunately and obviously the security was important to you.
A broker could sit down with you and work out whether you can save more than the ERC by remortgaging now but its unlikely, you're probably better off just overpaying within the agreed limits.

With the others, it will cost you more to pay the ERC if you switch deals, so stay as you are for now. Make maximum overpayments but don't pay more than allowed, as you'll be charged a penalty for doing so.

You win and lose with fixed rates, but they do offer security and certainty.

In 2 years time 3.99% May be a good rate!! They are on the rise so I'd over pay where you can to improve your LTV ratio for when you can change product.

Thanks everyone for your comments. For context, we bought a £185,000 house with a 10% deposit. We were both 25 at the time and we didn't have any 'bad' credit but also neither of us have credit cards so that have gone against us.

£700 a month is fine, although if I lost my job we might be in trouble. If DH lost his job we might struggle. At the moment we can save quite a bit each month and I'd favour putting a big chunk of this into overpayments but DH isn't so sure.

With everyone talking about 1.something rates I felt like we were in a terrible position, but I don't get that feeling from your comments here...

We bought around the same time and got 3 years fixed for 2.99%. The 1.something rates were definately not an option with a 10% deposit.

We fixed at 5% for 5 years and less than a year in rates dropped to 0.5%! We did overpay for a bit, then when it came to 2 years before the end of our term, and brexit was coming we took another much lower fix at about 2%, and bought ourselves out of the old one using the rise in our house value, which also put us in a much better LTV bracket. We had the same sort of mortgage numbers in terms of monthly payments but much lower penalty, £2k, and we saved that back with the reduction in monthly payment (but we overpay now anyway, have unlimited overpayments).

We fix for the peace of mind from knowing our bills won't change. Would have fixed for longer but anticipating moving at the end of the term we're in now.

I just used the calculator (thanks @lordemsworth) and it says I'd need a rate of 2.49 for it to be worth it. And given the current climate this would probably need to be fixed for a 2 or more years so that we're not hit by rises. This doesn't include the payment of valuation and legal fees either...

Yes that is very normal with mortgages you pay of the interest first. WIthout knowing your LTV (i.e. what deposit you put down) its hard to know regarding the interest rate (and credit rating etc)

When you first take out a mortgage over 20+ years you are only paying off a little bit of capital each year and mostly just servicing the interest repayments. Hopefully your property value is at lest keeping up with inflation so that helps it feel less painful. When we first bought (think interest rates for mortgage were more like 7%) buying was still an awful lot cheaper than renting.

Perhaps in a couple of years see an independent financial advisor so you can be more informed and happier about your decisions? It's always worth having some savings that are accessible before overpaying on your mortgage.

It's over a 35 year loan period. We decided on this to make it as affordable as possible incase anything happened with either of our jobs (I'm very risk adverse, probably to my detriment). We planned to reduce the term to 25 or less when we remortgaged at the end of the 5 years.

@randommess

It was a do-er upper, and I think with the renovations it will be worth at least what we have spend on it. After we finish the last couple of things we might get the estate agents in for a valuation. I feel reasonably confident we haven't lost money but not sure if we've made money on it. However there are plans for a new train station into town to be built nearby (but not too nearby) by 2020 which I'm hoping will make the area much more attractive to commuters and hopefully (fingers crossed tightly!!) will increase house prices in the area.

On Zoopla it's now saying it's worth £230,000 but not sure where they get these figures from.

I feel your pain we took out a ten year fix a year before the rates crashed.

Us too. 4.99% for ten years. We've come off it now and are overpaying, but when I totted up the other day how much unnecessary interest we'd paid over the ten years I felt really sick.

All sounds normal to me. We fixed at 4.89% for 5 years, just finished the fixed term. We fixed because we are also risk averse and didn't want the stress of a potentially fluctuating monthly payment while our salaries were low. We overpaid by £500/ month for some of the term and it took about 8 years off our total term.

If you need to convince your husband then I can only guess he doesn't understand the power of overpayments. It's daft not to if you have the spare cash imo; like giving money to the bank. You can get overpayment calculators online which show the amount of interest you'll save by making regular overpayments. Why not fill in one of those and show him? Good luck.

About over payments - you'll be lucky to get 1.5% in interest if you save it, but you'd be saving 3.99% on the same money - do the maths!

Exactly @Randommess. Actually, our savings are in an account with EXACTLY 1.5% interest . I will show him the calculators that I've looked at. I think we could realistically aim to overpay by £3,000 a year for now (will probably change if when we have kids!), so I'll suggest this.

Having just remortgaged, the really low rates are usually with hefty fees (£2k etc), so are only worth it with large mortgages. Check the overpayment details. Often if you have overpaid, you can then pause payments up to what you had overpaid, so if you lost your job you could do that and be no worse off than having the money in your account. Usually if you overpay, it reduces your monthly payments. You can ask instead (or their may be an option) to reduce your term. This means that after your 5 years you might have say 29 years 4 months instead of 30, basically saving you 8 months of interest.

Hi @bendingspoons. It says that ""a capital reduction of 10% per annum can be made without incurring an early repayment charge" I will check with the provider, but I take this to mean we can pay off 10% a year (including the actual scheduled mortgage repayments). So at the moment £16k?

I tried an overpayment calculator, and if we overpaid by £3k a year throughout the entire term we would "Overpaying would save you £55,066 in interest alone, and mean you pay the debt off in full 13 years & 0 month earlier." I used this one: www.moneysavingexpert.com/mortgages/mortgage-overpayment-calculator#results

Also worth noting the really low rates are only available when you have a loan to value of at least 60%. With a 90% mortgage the rates will be quite different so you probably didn't do that badly!

Cross post. Yes that sounds standard. But make sure you ask them to reduce your term with the overpayments, otherwise they may just reduce your monthly payments and it will take the same length of time to pay off.

@Bendingspoons Thanks for the tip, didn't realise we had to do that. Do you just phone the bank and ask to arrange an overpayment that reduces the term?

For those who overpay, do you normally do this in a lump sum or is it possible to arrange to pay an extra amount each month that comes out automatically? (e.g. rather than £735 we might pay £1000)

At one point I increased my monthly direct debit by a set amount e.g. £900 instead of £700. Yes just ring them and set up what suits you best.