Q I’m an older first-time buyer and intend to get a mortgage on a property that is worth no more than £110,000. The mortgage period is 15 years and I have a 15% deposit.
As I’m new to buying, I’m confused about fixed-term mortgages. Am I correct in thinking that, in theory, if I were to remortgage after a, say, two- to three-year fixed rate, the loan-to-value rate will have gone down, as I will have paid off some of my mortgage and the house presumably would have risen in value and therefore my mortgage payments would be a little less?
A You are right in thinking that after two to three years of a repayment mortgage, you will have paid off some of the mortgage loan, so the percentage of the value of your home which the mortgage makes up will have gone down (assuming that the value is the same or greater than when you bought the property).
This is the case with any repayment mortgage, not only fixed-rate loans. In the early years of a repayment mortgage it is true that most of the monthly mortgage payment is used to pay interest but a modest amount is also used to pay back the original loan. The percentage of the loan paid off at the end of the year can be a measly 1% at the end of the first year but will be more like 5% at the end of year three.
Unless the interest rate changes, the monthly mortgage payments won’t change, so reducing the loan to value doesn’t reduce the monthly payments. But it can if you remortgage at the end of your fixed rate because you will find that the lower the loan-to-value, the better the interest rate that is offered.
For example, with a variable tracker mortgage at HSBC, an 80% mortgage has an interest rate of 1.74%, while a mortgage of 90% of the value of a property has a rate of 1.84%. It’s a similar story with fixed-rate deals.