Mortgage fixed rate ending

[dpg50000]

Received a letter yesterday from my mortgage provider, as my fixed rate ends in 2 weeks. From the start of next month, my rate goes from 2.24% fixed (was taken out in 2018 as a five year fix) to 7.74% variable, assuming I don't do anything (I'll probably just pay it off as it's a small outstanding amount).

What I don't understand though is that there is 2 years left on the mortgage, yet the letter goes on to say my monthly payments are dropping (I worked it out at ~15% reduction). How can a more than tripling of the interest rate lead to a reduction of the monthly payment, when we haven't made any overpayments?

Also, the new monthly payment figure quoted is far higher than I get if I put the outstanding amount and 7.74% IR for 2 years into a mortgage calculator.

Obviously, I'll speak to them next week, but wondered if this has happened to anyone else?

[bomberbrown]

Isn’t this because in the final years of the repayment mortgage, you’re paying off practically all the principle and next to nothing of the interest charges.  

[dpg50000]

6 minutes ago, bomberbrown said:

Isn’t this because in the final years of the repayment mortgage, you’re paying off practically all the principle and next to nothing of the interest charges.  

Maybe I'm not getting it, but....

We took out a 7 year mortgage, with a 5 year fix. We paid X amount for 5 years at Y interest rate. The interest rate is now more than tripling for the remaining 2 years, yet the payments go down by 15%.

More concerning to me is why the new payment amount is a lot higher than I get by putting the  outstanding amount and 7.74% IR for 2 years into a mortgage calculator. I'm just glad I can just pay it off instead.

 

[fellow]

33 minutes ago, bomberbrown said:

Isn’t this because in the final years of the repayment mortgage, you’re paying off practically all the principle and next to nothing of the interest charges.  

I don't think so because the amortisation of the debt is already worked out in the monthly payments over the entire mortgage term. i.e. the capital owed reduces with every payment but so does the length of the mortgage remaining.

If the rate goes up when you remortgage, the increase would be smaller the more of the capital has been paid off but you should still see an increase.

[dpg50000]

13 minutes ago, fellow said:

I don't think so because the amortisation of the debt is already worked out in the monthly payments over the entire mortgage term. i.e. the capital owed reduces with every payment but so does the length of the mortgage remaining.

If the rate goes up when you remortgage, the increase would be smaller the more of the capital has been paid off but you should still see an increase.

Thanks, yes that was my understanding too. It's all a bit strange. I'll post back here after I've spoken to them next week.

[mynamehere]

Bomber sounds right to me. Interest isn't equally spread across the term.

In order to keep payments equal, the first year is mostly interest, and the last year is mostly capital, so in the final year of the term, an increased interest rate shouldn't change the monthly payment much.

 

(source: mortgage advisor)

[dpg50000]

8 minutes ago, mynamehere said:

Bomber sounds right to me. Interest isn't equally spread across the term.

In order to keep payments equal, the first year is mostly interest, and the last year is mostly capital, so in the final year of the term, an increased interest rate shouldn't change the monthly payment much.

 

(source: mortgage advisor)

Interest isn't, agreed. However, I borrowed X amount and agreed to repay it in 7 years. The first 5 years were at a 2.24% fix, and now it's transitioning to variable so surely the monthly payments should be going up as the IR is going to 7.74%.

[fellow]

15 minutes ago, dpg50000 said:

Interest isn't, agreed. However, I borrowed X amount and agreed to repay it in 7 years. The first 5 years were at a 2.24% fix, and now it's transitioning to variable so surely the monthly payments should be going up as the IR is going to 7.74%.

Maybe your five year fix included a large arrangement fee which was only spread over the 5 year term rather than the full 7 year term?

If so, as you only had a small mortgage left, the arrangement fee could be such a large proportion of the debt that your current effective rate is actually higher than 7.74%.

Your mortgage payments would then drop if the arrangement fee element of the loan has been paid off.

[fellow]

2 hours ago, dpg50000 said:

More concerning to me is why the new payment amount is a lot higher than I get by putting the  outstanding amount and 7.74% IR for 2 years into a mortgage calculator. I'm just glad I can just pay it off instead.

I bet this is because you can only put a full yearly number into the mortgage calculator i.e. 2 years but your mortgage only has e.g. 22 months left on it.

Due to the short period remaining, each month would be a relatively large % of the term so would make a big difference to the monthly payment.

Edited May 14, 2023 by fellow

[fellow]

51 minutes ago, mynamehere said:

Bomber sounds right to me. Interest isn't equally spread across the term.

In order to keep payments equal, the first year is mostly interest, and the last year is mostly capital, so in the final year of the term, an increased interest rate shouldn't change the monthly payment much.

 

(source: mortgage advisor)

I think this confirms you are not a mortgage broker, as some people seem to believe 😛.

[mynamehere]

59 minutes ago, fellow said:

I think this confirms you are not a mortgage broker, as some people seem to believe 😛.

Fair enough! Your answer sounds better

 

[Pmax2020]

I really don’t see what all the confusion is about….. 

You’re 60 months into the 84 month repayment of a loan, and now at the business end where the proportion of interest in your monthly repayment is now significantly lower than it was in year 1 and 2 etc. 

It stands to reason that a rate hike of just 5% isn’t going to impact things now. 

[bomberbrown]

This is a great mortgage calculator. (If on iPad watch out for bug you can’t press enter when entering IR value. You just need to swipe up to see the enter button)

https://www.drcalculator.com/mortgage/

To OP, if you put in the relevant values (for initial 7 year, then figures at 5 year point into another 2 year one) from the table tab you might get answers you’re looking for?

Edited May 14, 2023 by bomberbrown

[Freki]

Are you moving into interest only in your last 2 years? 

This is the only way anything would make sense

[fellow]

1 hour ago, Pmax2020 said:

I really don’t see what all the confusion is about….. 

You’re 60 months into the 84 month repayment of a loan, and now at the business end where the proportion of interest in your monthly repayment is now significantly lower than it was in year 1 and 2 etc. 

It stands to reason that a rate hike of just 5% isn’t going to impact things now. 

The confusion is about why the monthly payment is going down after the rate triples, which your comments do not explain.

If you take your reasoning to its logical conclusion then every payment you make would be lower than the previous one, which is obviously not the case.

As I said earlier, the ammortsation is already built in to the monthly payments so, if you continue at the same rate then the monthly payment will remain the same all the way through to your final payment.

Therefore how is it possible for the rate to go up but the monthly payment to go down? 

[Si1]

It's negative real terms. If you are really paying this with no catches then don't pay it off. Just pay the monthly amount.

[Pmax2020]

43 minutes ago, fellow said:

The confusion is about why the monthly payment is going down after the rate triples, which your comments do not explain.

If you take your reasoning to its logical conclusion then every payment you make would be lower than the previous one, which is obviously not the case.

As I said earlier, the ammortsation is already built in to the monthly payments so, if you continue at the same rate then the monthly payment will remain the same all the way through to your final payment.

Therefore how is it possible for the rate to go up but the monthly payment to go down? 

I spelt it out. The total interest accrued at 2.24% in years 1 to 5 equates to more than 7.74% on the remaining balance in years 6 & 7.

[fellow]

2 hours ago, Pmax2020 said:

I spelt it out. The total interest accrued at 2.24% in years 1 to 5 equates to more than 7.74% on the remaining balance in years 6 & 7.

No you haven't. You are talking about total payments and total inttest when we are talking  specifically about the change to the monthly payment.

If the OP had taken out a seven year fix at 2.24%, his mortgage payment would remain exactly the same for the full 7 year term and wouldn't suddenly come down at year 5 would it? So why would it come down if the rate goes up at the end of the 5 year fix?

[Pmax2020]

2 minutes ago, fellow said:

No you haven't. You are talking about total payments and total inttest when we are talking  specifically about the change to the monthly payment.

If the OP had taken out a seven year fix at 2.24%, his mortgage payment would remain exactly the same for the full 7 year term and wouldn't suddenly come down at year 5 would it? So why would it come down if the rate goes up at the end of the 5 year fix?

1) His mortgage was priced on a 5 year fix, not 7.

2) It’s probably primarily because 2.24% interest on the initial amount and its balance during the first 5 years accrues more interest than 7.74% does in years 6 & 7. 

3) We don’t know whether there was a fee and how it was paid. Is it sub account 2 on the mortgage for example?!

4) We don’t know if this was a fix for exactly 60 months, or if it was 62/63 etc. The last 2 year deal I got was actually 28 months!

5) We don’t know if there’s exactly 24 months left to pay or if it’s 20 for example.

6) We don’t know what the ‘representative’ homeowners rate was on the mortgage offer 7 years ago, for the final 2 years. 

Eg. His lenders homeowners rate in 2015 could’ve been BoE + 4.5%, therefore the repayment in years 1 to 5 was skewed greater toward reducing the deficit. 

7) Because fixed rates are almost  always cheaper than lenders SVR, it stands to reason you’re going to reduce you the amount owed quicker during a fix, while at the same time paying more interest. 

 

[fellow]

4 minutes ago, Pmax2020 said:

1) His mortgage was priced on a 5 year fix, not 7.

2) It’s probably primarily because 2.24% interest on the initial amount and its balance during the first 5 years accrues more interest than 7.74% does in years 6 & 7. 

3) We don’t know whether there was a fee and how it was paid. Is it sub account 2 on the mortgage for example?!

4) We don’t know if this was a fix for exactly 60 months, or if it was 62/63 etc. The last 2 year deal I got was actually 28 months!

5) We don’t know if there’s exactly 24 months left to pay or if it’s 20 for example.

6) We don’t know what the ‘representative’ homeowners rate was on the mortgage offer 7 years ago, for the final 2 years. 

Eg. His lenders homeowners rate in 2015 could’ve been BoE + 4.5%, therefore the repayment in years 1 to 5 was skewed greater toward reducing the deficit. 

7) Because fixed rates are almost  always cheaper than lenders SVR, it stands to reason you’re going to reduce you the amount owed quicker during a fix, while at the same time paying more interest. 

 

In response to your points:

1) No it wasn't!. His monthly payments were priced on a 7 year term as though the rate was 2.24% for the entire 7 years. The 2.24% was just guaranteed for the first five years. If the rate stayed the same after 5 years then so would the monthly payment. Therefore if the rate goes up then so would the monthly payment.

2) That's the total interest of all payments combined, not the monthly payment.

3) Agreed. This was my theory on one of my previous comments.

4) / 5) This makes no difference. Refer to point 1.

6) Yes we do. Refer to point 1.

7) The monthly payment stays the same but the proportion of interest on each payment reduces as more of the capital is paid off. It's called 'ammortisation' and this is already built in to the overall cost and split into 84 equal monthly payments over the 7 year term.

If the rate changes, the entire remainder of the term is recaculated and then split into equal monthly payments for the remainder of the term. There is no way an increase in the rate can cause the monthly payment to come down (unless the term is extended or overpayments are made).

[dpg50000]

Thanks all. Like I said, when I've spoken to them, I'll post back here. Must be some kind of rational explanation... I can confirm however, that no product fees were involved and it was exactly a 5 year (60 month) fix, with no overpayments or term extensions (2 years left to run). And the mortgage has daily interest calculated. It's strange.

Edited May 14, 2023 by dpg50000
Clarify remaining term

[Pmax2020]

1 hour ago, fellow said:

In response to your points:

1) No it wasn't!. His monthly payments were priced on a 7 year term as though the rate was 2.24% for the entire 7 years. The 2.24% was just guaranteed for the first five years. If the rate stayed the same after 5 years then so would the monthly payment. Therefore if the rate goes up then so would the monthly payment.

2) That's the total interest of all payments combined, not the monthly payment.

3) Agreed. This was my theory on one of my previous comments.

4) / 5) This makes no difference. Refer to point 1.

6) Yes we do. Refer to point 1.

7) The monthly payment stays the same but the proportion of interest on each payment reduces as more of the capital is paid off. It's called 'ammortisation' and this is already built in to the overall cost and split into 84 equal monthly payments over the 7 year term.

If the rate changes, the entire remainder of the term is recaculated and then split into equal monthly payments for the remainder of the term. There is no way an increase in the rate can cause the monthly payment to come down (unless the term is extended or overpayments are made).

Your first sentence is wrong. The mortgage agreement would’ve shown 60 months @ 2.24%, and then 24 @ the SVR. 

It’s entirely possible the lenders SVR was something like BoE + 4% back then, meaning year 6 & 7 were projected to have a disproportionately smaller amount of the loan remaining because the interest was to be higher.

It’s all academic anyway. It stands to reason you’d be paying back less on the final years/months of a mortgage. Not sure why that’s a surprise.

[fellow]

8 hours ago, Pmax2020 said:

Your first sentence is wrong. The mortgage agreement would’ve shown 60 months @ 2.24%, and then 24 @ the SVR. 

It’s entirely possible the lenders SVR was something like BoE + 4% back then, meaning year 6 & 7 were projected to have a disproportionately smaller amount of the loan remaining because the interest was to be higher.

It’s all academic anyway. It stands to reason you’d be paying back less on the final years/months of a mortgage. Not sure why that’s a surprise.

Even if what you are saying is correct, the average SVR was about 4.75% five years ago which is lower than the current 7.74% SVR so the decrease still doesn't make sense.

[dpg50000]

Just to post an update:

I ended up speaking to an Indian call centre, who weren't a great deal of help and hard to understand (thick accent). I did confirm I can just pay off the balance without penalty when the fixed rate expires.

Interesting, I just got a letter today telling me that the IR on my mortgage (when it switches to SVR) is going up by 0.25% to 7.99%. However, the new repayment amount is less than the original letter they sent me, though still way higher APR wise than 7.99% IR should be. I'm beginning to have some sympathy for people struggling to make sense of their mortgage payments....

[fellow]

7 minutes ago, dpg50000 said:

Just to post an update:

I ended up speaking to an Indian call centre, who weren't a great deal of help and hard to understand (thick accent). I did confirm I can just pay off the balance without penalty when the fixed rate expires.

Interesting, I just got a letter today telling me that the IR on my mortgage (when it switches to SVR) is going up by 0.25% to 7.99%. However, the new repayment amount is less than the original letter they sent me, though still way higher APR wise than 7.99% IR should be. I'm beginning to have some sympathy for people struggling to make sense of their mortgage payments....

It looks like the bank is actually paying you interest?

All I can think of is you have an offset mortgage with more money in the linked saving account than outstanding on the debt?