Mortgages - explain it to me like I'm a moron

[Ohalrightthen]

Because obviously I am one.

I understood this when our broker explained it to me a couple of years ago, but post-baby my brain is literally mush and I just can't get my head round it.

We took out a 35-yr mortgage with a 5-year fix on about 2.1%. Fix runs out in a few years. We had about 14% equity at that point. We've now done a huge amount of work on the house that takes our equity up to about 45%.

If we remortgage when our fix runs out, if we can get a similar interest rate can we expect our payments to go down, due to the increase of equity we have, or as the balance is roughly the same will they stay roughly the same?

I know it sounds ridiculous that I don't understand this, and I absolutely did understand it when I took the mortgage. People made jokes about babybrain, but jesus christ, it is not funny.

Yes you should be able to get a better rate of interest, banks offer lower rates if you are taking out a smaller loan-to-value. So if you have a 65% ltv (35% equity) you get a better choice of deals than a 75% ltv.
As interest rates are pretty small anyway, it may not make a huge difference to your repayments and the best advice would be, even if the repayment comes down, carry on paying the full amount so you are making overpayments. This really reduces your loan term, especially if you do it early on.

If you have the same loan amount and the same interest rate then your payments will be exactly the same. The fact that your house has increased in value, therefore you have more equity, is not relevant as the amount you owe stays the same.

There may be an advantage in remortgaging and so your 'Loan to Value' ratio changes and you may be able to benefit from lower interest rates. This is not guaranteed, but if your interest rate were to reduce then your payments would reduce.

You’d be better keeping the same payments and repaying the mortgage faster- you will save £1000s doing this.

There are mortgage repayment calculators online that have graphs that really clearly show your options if you tweak interest rates etc.

Assuming you remortgage for the same amount for the same remaining term (30 years by then in it was 35 to start) you may get a better mortgage deal if you loan to equity ratio has improved ie value of house has improved. But I would not calculate this into spending plans because the next 3 years or so are hard to predict from an economic perspective. If you can it's highly advisable to reduce your term if you can afford it, I had no idea mortgages were ever more than 25 years!

If the interest rate is the same then no. But if you get it revalued and your ltv ratio will go down and you can get a lower interest rate which will reduce your payments

Thanks all - the plan was always to keep paying the same amount off and overpay if possible, but then i started second-guessing whether that was doable or not and got myself muddled.

RE @mootymoo's point about terms - I don't know anyone not classed as a "high earner" who's taken out a mortgage term of less than 35 years in the last while, they're simply not feasible for most people of my age bracket.

There are often better options available the more equity you have, especially in an uncertain market that we are in at the moment, 45% equity is much less of a risk than 10% so they price the mortgage deals accordingly.

However if you remortgage after 5 years and are able to secure a better rate, if it were me I would try and keep the payments more or less the same as before but reduce the term to 25 years. Alternatively keep the 30 year term and take a deal where you can overpay each month so you can repay it early.

I had no idea mortgages were ever more than 25 years!

Pretty standard to have longer terms now.

Possibly if a lender valuation agrees with the higher valuation, lower LTV (Loan to Value) and offers a lower rate which stacks up when fees are taken into account.

Go here:
www.moneysavingexpert.com/mortgages/best-buys/

Plug in your numbers and find out.

You might want to also look at the early repayment fee on your current 5 year fix. It's possible that you don't need to wait until the end of the term to find a new mortgage that leaves you better off overall.

If you borrowed a set amount to purchase your home then this is the amount you owe. It doesn't reduce because your house is worth more, it only reduces when you pay it off.

If you are up for a renewal of the mortgage then you could shop around for a better deal, but the amount you borrowed initially still needs to be paid bank to your lender.

If you were to sell the house and pay off the mortgage you'd be left with a bigger chunk of left over money (equity) than before because you've made improvements.

If you stay and remortgage you might be able to get better terms for paying back the money you owe, but as previous posters say, it's better to make overpayment if you can and pay back that loan (mortgage) ASAP.

It's a bit like borrowing £10 from your mum for cake ingredients, you make a cake and then sell it on for £20. You would still owe your mum £10, regardless of the amount you sold your cake for. If you choose not to sell the cake you still owe your mum £10.

Same with the house, you bought it by borrowing £x it's now worth £xx but you still owe the lender the original amount, this doesn't change unless you pay it off. The difference is you are charged interest for every month the debt is outstanding, usually for 25 years.

The amount you pay depends on the amount borrowed, the time its borrowed over, and the interest rate.

Having higher equity may get you access to better interest rates, and so lowering the repayment, but wont lower the repayment on its own.

If you possibly can, I'd lower the term of the mortgage - but them I'm living in an affordable part of the country, and just cant fathom the sort of money some people need to find to buy a house.

You will have paid some off so the new mortgage will be for slightly less money (not much, most of the money you pay at the beginning is interest).

If your house has appreciated in value, and typical mortgage rates are lower, you might get a better rate as your original mortgage will have been for a 90% LTV - they tend to go down in 5% steps and you won't have qualified for an 85% LTV one. Now you should qualify for the 60% deals, which should be a lower interest rate.

Now, unless you really need your mortgage payment to be lower, you should shorten the term if you can, because 35 years is a long time and the longer it takes you to pay off, the more interest you are charged.

Maybe put the new details into a mortgage calculator to see what the new rates, payments and total amounts will be. If you can afford the current payment, and can get a better rate, see what length of mortgage you can go down to, while keeping the payment the same. It should be a lot less than the 30 years that you will have left at the 5 year remortgage point.

The key is

For a mortgage
You borrow the value of the property
Plus you pay interest
Eventually, you should only have bills & repairs to pay

I am due to pay my last payment this year, but it was considerably less than 35 years !

@mootymoo I always advise to take the longest mortgage you can and overpay rather than get stuck with a shorter term one and being FORCED to pay a certain amount. You never know what could change and that flexibility is golden. I have a friend right now who is struggling to pay her mortgage and she insisted on a 15 year deal when she could have taken a 30 year one... She's learnt her lesson and is desperate to remortgage to a longer deal now.

For what it's worth my first mortgage was 40 years, they're pretty common now.

I don't think the fact that your house has increased in value will make any difference to your repayments. It would only make a difference if you got a more favourable interest rate.

I hate the word moron.