I could cut my mortgage bill significantly. But is it worth doing?
A house on my street was put up for sale this week.
And while that is always an opportunity to have a nose around your neighbour’s home, if you're so inclined, it has also potentially created an opportunity for me to significantly cut the size of my mortgage, saving thousands of pounds in the process.
But should I do it?
House prices
We bought our house back in early 2013, wanting a bigger home for our expanding family. Back then, we paid just shy of £250,000 for the property. It was a big move for us, leaving behind the little maisonette that had been my wife and I’s first home together.
And while we had seen the maisonette rise in value in our two years there, we still needed an 85% loan-to-value (LTV) mortgage to buy our new home. That meant the rates weren’t exactly amazing – we eventually settled on a lengthy fixed rate from the Co-op at 3.70%.
Fast forward to today, and the revelation that our neighbour’s home is on the market for £335,000. That’s a big old jump on what we paid for our house. What’s more, our property benefits from having two extra bedrooms compared to the neighbouring property, as well as almost all of the rooms being completely redecorated since we moved in.
If their house is worth that money – and obviously, there is a difference between an asking price and the actual value – then surely our home is worth at least that, right?
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What it means for my mortgage
And that’s where my mortgage comes in.
If we chose to remortgage today, and our house was valued at £335,000, it could make a pretty big difference to what we pay each month. At the moment we shell out just shy of £1,000 a month on our mortgage, a significant chunk of our income.
But we got that deal back when we only had a 15% deposit. If our home was valued at the same level as our neighbour – or even better – suddenly, we are in a drastically different LTV band.
The potentially improved value of our home and our remaining mortgage would now put us around the 60% LTV mark. And that means much more exciting mortgage rates – a two-year fixed rate from Yorkshire Building Society, for example, comes with a rate of a paltry 1.16%, meaning monthly repayments of about £790.
[SPOTLIGHT]An extra £200 a month could go an awful long way.
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Why I’m hesitating
Inevitably, it’s not quite as simple as that. Our rate is fixed for a little bit longer, and I’m tempted to hang on. If our house has supposedly grown in value this much since we bought it, what will it be worth when our fixed rate actually ends?
There’s also the problem of the Mortgage Market Review, which came into force last April. It means lenders need to be a lot stricter about their affordability tests when looking at a mortgage application.
Since we bought our home, my wife has moved from a permanent teaching job to doing supply teaching, to offer us a little more flexibility with our children.
Not only has her income taken a dent, but it has also become a lot more volatile – she may work four days one week, then not at all the next.
I worry about how a lender will view that today, in this age of stricter testing. You’d think that as we are happily clearing mortgage payments of nearly £1,000 a month, a lender would happily sign off on a smaller mortgage deal. But logic has not exactly been the mortgage market’s strong suit since I started writing about it the best part of a decade ago.
A matter of pride
There is also, I’m ashamed to say, an element of pride in this. You see, I’ve been wrong about mortgages. More than once.
When we bought our first home back in 2009, I insisted on a lengthy fixed rate mortgage. It was my first mortgage, my first time living away from my parents, and I wanted to be absolutely certain we could pay the mortgage every month for a decent period of time, without having to worry about remortgaging. And we weren’t planning to move anytime soon, anyway.
A couple of years later, married and with a child, we suddenly realised we needed somewhere bigger. So we ended up having to pay an Early Repayment Charge of a couple of thousand pounds on that first mortgage. We had paid a higher rate for the security of a long-term fixed rate, which we then had to spend thousands to get out of early, and it was my fault.
I didn’t learn the lesson.
Again I insisted on a long-term fixed rate mortgage. There was no way Base Rate would stay at 0.5% for much longer, I reasoned. And again I wanted the certainty of knowing what I’d be paying every month for a long period.
But here we are, almost three years later, and I’m faced with the prospect of possibly shelling out once again on an Early Repayment Charge in order to remortgage. And that hurts.
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What should I do?
So I’m throwing it over to you, the loveMONEY community. What should I do? What would you do? Would you take the hit of a chunky Early Repayment Charge, happy in the knowledge that you’ve slashed your monthly bill? Or would you hold on?
And what type of mortgage would you go for? It will be no surprise that once again I’m having my head turned by a lengthy fixed rate mortgage.
It’s over to you.
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