Is a fixed, capped, or discount-rate best for paying off mortgages fast
Wednesday, 31 January 2007 12:00
When shifting from an un-competitive rate to pay off a home loan fast is it best to go for a fixed-rate, capped-rate, or discount rate mortgage?
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Drawing on years of experience mortgage adviser Katie Tucker - of mortgage broker John Charcol (www.charcolonline.co.uk) - answers your questions.
Frances C asks
Currently I have a mortgage for £73,000 (£30,000 interest-only, balance repayment). It is a tracker mortgage and the rate has just risen to 7.25 per cent. The outstanding balance at 13th January was £69,500.
I aim to clear the outstanding debt as soon as possible and am fortunate enough to be able to pay £20,000 off now.
My dilemma is whether to go for a fixed/capped or discount mortgage. I currently pay £418 per month, if my monthly payments were to reduce I would save the difference and use it to pay off the mortgage when allowed to make capital repayments. An endowment policy matures in 2014, it was to cover £28,000 but is currently under performing - £20,000?
I would appreciate you views.
Katie responds
Hi Frances,
7.25 per cent is an extremely uncompetitive interest rate and you are right to remortgage now.
You now have £39,500 on repayment and £30,000 on interest only. Realistically you need to reduce the interest only part to £20,000 to match the expected endowment value.
This part of the loan can just drop off when the endowment matures in six years. You can set up the loan however you like when you remortgage so you literally need to just shift the £10,000 over to the repayment part taking the repayment part up to £49,500 and the interest-only part to £20,000.
A typical remortgage rate at the moment is Nationwide's two-year fix at 5.14 per cent. This comes with a free valuation and free legal work, and the arrangement fee of £899 can be added to the loan.
You mention that you have £20,000 available to pay against the mortgage now. You would be best placed to pay off as much of the interest only part of the debt as possible, as this part is not reducing any other way.
If you do this and just leave yourself with £49,500 on a repayment basis, (assuming the rate as before) a monthly payment of £418 will get it down to £32,000 by 2014. At this point you would pay off the £20,000 endowment payout leaving yourself with a debt of £12,000.
This will take you a further 2.5 years to clear at £418. You might even be able to clear it quicker than that if you had been paying endowment premiums and have extra money from that to contribute.
The actual type of interest rate will make little difference to the speed at which you pay off your mortgage.
Your goal as you so rightly say is for the interest to be as low as possible so you can pay as much as possible in to reduce the capital debt so the decision should be based on how you think the rates are going to move over the next few years.
I don't have a crystal ball either but at little more than a guess: we are expecting a rise in February, perhaps another this year but it is likely that this will come down once again in the following year.
You must decide if you can afford the potentially higher payments with a variable rate if the rates increase, or if you would like the security of the fixed. You might like to look at a five-year rate if you have no intention to move and want to budget.
If you have a question for Katie, go to www.myfinances.co.uk/askthemortgageexpert
For more information on the issues discussed here, go to www.charcolonline.co.uk or call 0800 358 5560.
Charcol Limited is authorised and regulated by the Financial Services Authority (FSA registration number 427339). The FSA does not regulate credit cards, personal loans or some investment mortgage contracts. Some Buy To Let mortgages are regulated by the Consumer Credit Act (CCA).
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