I’m not just talking about using a mortgage calculator to work out what the monthly payments will be but how to make use of a calculator that shows the ‘amortization’ or monthly & yearly breakdown of payments and balance as well as the difference an overpayment could make.
Anybody who has any exposure to mortgages will know there are several options available which include fixed rate deals, trackers or lender’s ‘standard variable rates’.
Fixed deals last for a set number of years and for those set years the interest rate stays the same.
Tracker deals may offer an interest rate that ‘tracks’ another rate such as the Bank of England base rate with a set percentage difference. e.g. BBR (Bank Base Rate) +2%. (The base rate is 0.5% so the tracker rate would be 0.5% + 2% = 2.5%).
Variable rate or lender’s Standard Variable Rates simply start at a certain rate and can fluctuate up or down from that point. These rates are usually higher than fixed or tracker deals to encourage people to tie themselves into a lower rate deal with a particular lender (or to make a tidy profit from people unable to switch lender due to credit problems or reduced income).
A fixed rate deal offers security because monthly payments will not change for the term of the deal but what if the safety of fixed payments is not your main agenda?
What if the thing that really motivates you is getting clear of your mortgage as quickly as possible?
In order to clear your mortgage more effectively and pay less interest in the process it will be important to know if a fixed deal or a tracker will leave you better off.
Will the outstanding balance be lower after a 2 year deal at 3% compared to a 5 year deal at 5%…?
For the purpose of this exercise I will be using the mortgage calculator I put here:
I hunted high and low for a good calculator to place on that site and I think I found a good one!
It produces amortization tables with a month-by-month breakdown.
Let’s look first at an example of a £150,000 mortgage over 25 years.
Assuming an initial fixed rate deal of 3% the calculator shows this:
If you then click on the ‘Amortization Schedule’ tab it shows this:
As you can see it shows a monthly breakdown for the first 12 months and you can scroll this amortization schedule to look at every month for the full 25 years.
In the graph the black line represents the timespan which is 25 years. The red sections are the interest (which goes down over time as the debt reduces) and the green sections are the ‘capital’ (how much you are actually paying off the debt).
The big thing wrong with this is that fixed deals only last for a set number of years, typically 2, 3 or 5.
Going for the middle, if the mortgage is on a 3 year fixed rate then we need to scroll down to month 36 and look at the numbers.
This shows the outstanding balance after 3 years.
Now that we know where to look, let’s see the difference between taking a 2 year fixed at 2.49% with a £995 fee compared to a 2 year mortgage at 3.45% with no fee.
2.49% with £995 fee:
Note the ‘total’ shows £150,995 to include the fee – this assumes the fee is added to the loan.
3.45% with no fee:
As you can see, even by adding an extra £995 to the mortgage, a rate of 2.49% will see you about £104 better off.
But wait! The mortgage at 2.49% works out at about £676/month so in 24 months costs £16,224. The mortgage at 3.45% is about £746/month or £17,904.
The 2.49% mortgage saves £17,904 – £16,224 = £1680 over 2 years and still reduces the mortgage by over £100 more!
Worth finding out in advance? I think so.
Now how about this option. Take the £1680 saved and divide by 24 = £70.
Instead of saving this, how about using it to overpay the mortgage each month? Put £70 in the ‘overpayment’ box and:
The mortgage could be paid off in 21.9 years and after 2 years the debt is £1721 lower even though you only paid an extra £1680.
Try more overpayment figures and see how drastically you can reduce a mortgage by overpaying.
If making overpayments it’s important to know there could be penalties if you’re tied into a fixed or tracker deal but probably not if you’re on the lender’s SVR (standard variable rate).
When comparing tracker rates it’s also important to know the rate could change so any calculations can only be estimates.