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Comparing mortgages - Am I doing it wrong?


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I'd like to consider myself a reasonably experienced BTL investor and I'm looking at options to remortgage one of my properties.

The advice from my mortgage advisor (who's well respected in property circles) is to switch to a new lender for a cheaper rate, but incur the lender fees and conveyancing. When I look at the total costs, I'm convinced it's not the cheapest option.

Am I looking at this the wrong way? (Below and attached)

https://docs.google.com/spreadsheets/d/1vHIAclIqjcXFTHp8I0DNGoL6Fdq2IXOed9Kwi2xXYLU/edit?usp=sharing

I think if I was paying £2.5k in fees every 2-5 years to try and say £25/month, it would be a pointless exercise?

I'm hoping someone can sense check my numbers here!

Many thanks,
Chris

 

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When brokers use their mortgage sourcing software there are two ways of dealing with fees. You either tick a box to add them to the loan and then work out total cost over 5 years, or you add the fees onto the total cost. You'd need to know which approach they take, personally i think the latter should be the correct option in every case.

The former approach does ignore those fees stacking up because on a 25 year loan, you are only factoring about 20% of the effect of the fee and thats without considering compound interest over the term too. You can still add the fee, but you know the interest saving exceeds the cost of that fee and will leave you better off.

However you made an error in the calculation: You can see in your loan amount that the fee has been added on already. You have then multiplied the monthly repayment by 60 and then added on the fee again!

Set the loan as £93,750 in each case and sum the interest over 5 years, and then add on all the fees afterwards. Brokers also have solicitors that will price match the legals for the cashback amount, so you either take a free solicitor, or you ignore the cashback as an incentive because it will be taken by the solicitor anyway. Its prefereable because the free legals dont start until the mortgage offer is produced, whereas the cashback option means you can start simultaneously and the solicitors can be chosen, a voiding those waful lender allocated ones.

Either way theres not much in it,  those two differences fall to £276 and £307 respectively, but when i run a check there are other deals £1000 cheaper on fee, but only 0.1% higher in rate which i think is about £223 cheaper that 1a. In that case i would be telling you just take the easy retention route because that works out at £3.71 saving a month and whilst compound interest on fees is harder to calculate long term, its probably going to take a chunk of that already modest saving, and you avoid all the time spent on paperwork.

Dont forget the broker still gets paid about half a regular commission for processing a retention deal, certainly the case with Accord, for literally just clicking a few buttons...

 

 

043_logo_final_03.png.0cdf828351f81e6097208048ac2d018d.pngStuart Phillips

Independent, Whole of Market Mortgage Broker

AALTO Mortgages Ltd

Web  www.aaltomortgages.com

Email  sales@aaltomortgages.com

Call  020 7183 1101

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No, that's cool @chrispbacon

You are using Total-to-Pay like a semi-pro. Most people fixate on the Interest Rates so your definitely on the right track.

Of course that tool only works if all those products are 5 year fixes, as you have not included the Standard Variable Rate (SVR).

As @Stuart Phillips outlines and the Financial Conduct Authority (FCA) puts a lot of emphasis is if the fees are Added to the Loan or Paid Upfront. If they are paid upfront them your spreadsheet works fine, if they are added to the loan then there is a compounding effect that your calculator does not account for. 

Though shouldn't your Mortgage Adviser be doing this for you? Accord & BM Solutions are both Intermediary Only Lenders.

(I don't follow Stuart's opinion on Product Transfers. There is as much work for a broker up to the point of application as there is with remortgages. Or at least it is if they are doing it right and not just proceeding on Execution Only or Client has indicated they don't want the hassle of Valuations and longer Process.. The application is easier but the process to make the recomendation of a Product Transfer is the same and has to include remortgageing to third parties.

:wub: Get Mortgage Advice from my Team at Bespoke Finance on 08009202001 or email hello@bespokefinance.info 
:ph34r: 
Please don't take my messages on Property Hub as Personal Financial Advice, just a rambling guy passing time on a Coffee Break.
 

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@Adam Hosker I wouldnt suggest a PT because its less work for me, ive shown my working and the reason i'd make that recommendation. I do that work regardless of whether i was even getting the business or not. Its a better outcome for the client on the basis that the £200 saving will be eaten by compound interest, exit/admin fees (accord - £90) and funds transfer fees (2x £35) easily, without even factoring a broker fee. The fact its also the simplest option is a bonus.

Chris is right to question the advice, because i dont think that broker has been transparent or even got the maths right, if they had there wouldnt have been a need for this post. Just because we are giving advice doesent mean we should be expecting clients to blindly trust what we say...

 

043_logo_final_03.png.0cdf828351f81e6097208048ac2d018d.pngStuart Phillips

Independent, Whole of Market Mortgage Broker

AALTO Mortgages Ltd

Web  www.aaltomortgages.com

Email  sales@aaltomortgages.com

Call  020 7183 1101

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@chrispbacon That is exactly how I compare mortgage products available. 

I am not a mortgage broker so the comparison method we are using may be a bit crude. However, I did once upon a time work for a finance company and the one piece of advice we given when taking finance was too look at the total amount repayable at the end of the term of the loan. 

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Thanks @Scooby, @Adam Hosker and @Stuart Phillips for taking the time to reply! Some really detailed replies there, so very much appreciate the help and advice. Glad to know I'm not far off! 🙂

 

10 hours ago, Stuart Phillips said:

However you made an error in the calculation: You can see in your loan amount that the fee has been added on already. You have then multiplied the monthly repayment by 60 and then added on the fee again!

I think that's right Stuart? 🤔

In the top section, the fee is added to the loan purely to calculate the right monthly interest payments (not the total repaid).

In the bottom section, the fee is added because it needs to be paid back somewhere.

I think that's right!

 

8 hours ago, Adam Hosker said:

If they are paid upfront them your spreadsheet works fine, if they are added to the loan then there is a compounding effect that your calculator does not account for. 

Oooh that sounds "interest"ing 😆 The fees are added to the interest-only loan at the start, so I think the loan amount stays constant? Where will the compounding be? (Keen to learn what I'm missing!)

 

Thanks again for the help and advice!

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8 hours ago, Adam Hosker said:

Though shouldn't your Mortgage Adviser be doing this for you? Accord & BM Solutions are both Intermediary Only Lenders.

 

Well, I did ask for them to look at options compared to a Product Transfer with all fees taken into account, but I'm only realising it might not have been the best recommendation now....after I've signed the BM paperwork commiting to the £1,995 fee 😔

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