This article on choosing the best mortgage rate is by The Dink from Team Monevator. Check back every Monday for more fresh perspectives on personal finance and investing from the Team.

The email from my bank practically begged me to pay attention: “Dear Mr Dink, it’s almost time to switch to a new mortgage rate.”

I’ve only renewed my mortgage once before. That time it dropped my monthly repayments by £70. So I’m excited by the prospect of more of the same.

Renewing a mortgage was not always pleasant. Speak to anyone who had a mortgage in the 1970s and they’ll tell you that. The 17% minimum lending rate some saw back then could be life-changing – if not life-threatening.

At 17%, my monthly mortgage payments would triple to £1,800.

Ouch!

My bank’s email also reminded me to be grateful to simply be on the housing ladder at all.

As a millennial, many of my friends are stuck in a cycle of not being able to save for a deposit. The high cost of rent is too high.

The average house costs around £300,000. Buying one requires a 10% deposit of £30,000. You need to be saving about £1,000 a month for three years to cover the deposit and associated buying costs. All while paying rent.

Ouch, again.

My mortgage history

We bought our house in 2016 for £172,000 with 90% Loan To Value (LTV) mortgage at 2.49%, fixed for two years. The monthly payment was £820.

In 2018 we switched mortgage and topped up. This got us into a better 75% LTV bracket. We fixed at 1.99%, with a £750 monthly payment.

Today in 2021 the house is valued at £220,000. The mortgage balance is £120,000. Our LTV has come down to 54%.

We didn’t overstretch ourselves in 2016. This despite the bank offering us five-times our salary and the standard advice being to get as big a house as possible to leverage house price growth.

Instead, we bought a modest house to give us more flexibility.

Sure, in a good year a £500,000 house might go up by over 3%. That’s £15,000 in extra net wealth! However, you don’t get to see that money until you sell. Even then, selling is a painful process that takes months.

A cheaper house also fitted our lifestyle back then. Our smaller mortgage was not a burden. At a pinch we could pay it with a single salary if we had to (albeit by living on bread and water.)

The money we would have spent on a £500,000 mortgage has instead been funneled into our ISA accounts. Those have done pretty well so far!

Should we pay off the mortgage?

At the start of my FIRE ¹ journey I wrote up a rough allocation, which I believe matches my risk profile.

My asset allocation manages my inner conflict between three competing tendencies – active investor, sensible passive investor, and wannabe crypto punk.

This is how I divide my assets:

• 60%: Passive ETFs
• 30%: Actively traded
• 6%: Cash
• 3%: Gold
• 1%: Crypto

This allocation enables me to sleep at night. I’ve stuck to it and rebalanced as required.

Now, after seven years of maxing out my Stock and Shares ISAs, we have enough to pay off the mortgage should we choose to.

It is tempting. But would it lose me money overall?

With a mixed portfolio it’s very hard to estimate what return you can expect over the next five years.

Compare that with using the money to pay off your mortgage. In this instance all the numbers required are known upfront. You can therefore calculate a certain ‘return’ on paying off some debt to the nearest penny.

To get an approximate idea, I turned to a compound interest calculator. I assumed my portfolio would return 4% over the five year term of my next mortgage fix.

Scenario #1: Pay off the mortgage

Let’s say I withdrew £120,000 from ISA to fully pay off my mortgage.

Obviously there would be no more mortgage repayments after that.

So I assume I will pay the freed-up £640 – which the mortgage would have been costing me each month if not paid off – into my ISA.

After five years – at that guesstimated 4% – I would have £42,431.

To recap, after five years:

Remaining mortgage: £0

ISA balance:  £42,431

Net: £42,431

Scenario #2: Don’t pay off the mortgage

Alternatively, what if I left the £120,000 in my ISA (assuming again 4% return on my portfolio) and continued to slowly pay down my mortgage?

Five years after not paying off mortgage:

Remaining Mortgage: £86,992

ISA Balance:  £146,519

Let’s say I then – after five years – used the ISA balance to pay off the mortgage – so £146,519 minus £86,992.

Net: £59,527

The financial difference

On these numbers I’d end up £17,000 better off by waiting another five years before paying off the mortgage.

This is my personal situation. It is based on that 4% estimated return from my portfolio. Different numbers would obviously change the final result.

My portfolio might well earn less than 4%. However I’d be willing to take that risk. I think 4% is fairly conservative compared to historical returns – and there’s also a chance I would earn more than 4%.

Paying off the mortgage completely will not give me a chance of reaching financial independence any sooner.

Having more money growing in my ISA just might.

LTV thresholds

Last time we renewed our mortgage we paid in a few thousand extra pounds to get us into the next 5% LTV bracket.

This money came from my ISA. I believe it was definitely worth it to reduce the monthly mortgage payments by qualifying for a better interest rate.

Since then, the recent house price boom has increased the value of our home by enough to get under the top 60% LTV for best rates.

Offset Mortgage

I’ve previously found it hard to see a situation where an offset mortgage would be useful to us. But based on my comrade’s enthusiasm on Monevator, I re-ran the numbers.

If I converted everything outside of my ISA – that is gold, crypto, and cash – to a savings account to offset against the mortgage, it could give me £10,000.

The bank would now calculate the mortgage against £110,000 rather than £120,000 – but at a higher rate of 1.39%

This gives me £40 a month cheaper mortgage payments of £600.

Honestly, the offset is more competitive than I thought it would be.

However, I’m happy to take the chance that my £10,000 left in mixed assets will grow enough to beat the £40 a month saved – and maybe by a lot more.

Again, something to decide based on your situation and risk appetite.

The best mortgage rate

I don’t get wound up striving for the absolute best mortgage rate. There is not a life-changing difference between most fixed deals I look at.

For the convenience of renewing with my current provider, I don’t mind paying an extra few quid a month. It helps that my current provider has consistently ranked at the top of the mortgage rate tables.

What you must avoid is ending up on an expensive variable rate.

Premier customers

Because of the large lump in my ISA, I’m a premier customer at my bank. This sounds great, but I really struggle to make use of any of the perks.

My bank offers a ‘5-year Fixed Premier’ account with a good rate. But the large arrangement fee means it’s not worth it on our small mortgage.

Lounge access at the airport, though, is brilliant!

What if we move home?

Well-meaning friends have told us we should not renew our mortgage if we intend to move within the next 18 months. Instead, they say, we should go onto the variable rate

We’ve lived in this tiny house through lockdown. With the prospect of working from home a lot more, of course we would like a larger home soon.

Our friends’ advice centres on the Early Repayment Charge (ERC). This becomes due if you pay off a fixed-rate mortgage before the term is up.

On our current mortgage the ERC is 1% of the amount repaid early, for each year remaining of the fixed rate.

However our mortgage advisor has assured us that most people can ‘port’ their mortgage when they buy their next house. So hopefully by doing so we can avoid any penalty payment when we eventually move house.

I’ve heard of another life event that this fee can nail you on. That’s if you get divorced and have to sell the house.

If in that situation you need to pay off the mortgage early you might be liable to pay a charge. So if your relationship is a bit rocky don’t sign up for a five-year fixed mortgage with potentially a near-5% ERC.

(Of course if your relationship is already shaky then explaining why you want to avoid a five-year commitment might itself lead to an interesting conversation…)

Exploring the fixed rates on offer

My bank seems to always be near the top of the mortgage tables. Handy.

I therefore started my search by creating a spreadsheet with all my bank’s fixed mortgage options, over two, three, and five years.

Once I decided what rate suited us best, I plugged it into a couple of mortgage comparison sites. Just to make sure it was fairly competitive.

I’m not going to share my spreadsheet. It’s a brilliant exercise to write one yourself. (Also, I’m scared of any liability or criticism that may be directed at my sheet!)

The deals in detail

These are the mortgage deals my bank offered me:

Product	Fee	Rate %	Years
2-Year Fixed Fee Saver	£0	1.14	2
2-Year Fixed Standard	£999	0.94	2
3-Year Fixed Fee Saver	£0	1.34	3
3-Year Fixed Standard	£999	1.09	3
5-Year Fixed Fee Saver	£0	1.34	5
5-Year Fixed Standard	£999	1.09	5
5-Year Fixed Premier Standard	£1,499	1.06	5

I then turned to the basic mortgage calculator at Money Saving Expert. I plugged in my mortgage debt (£120,000), mortgage term (17 years), and the interest rate of each deal.

This gives me a monthly repayment and a remaining debt figure (at the end of the term) for each deal:

	Fee	Rate %	Years	Monthly	Remaining
2-Year Fixed Fee Saver	£0	1.14	2	£648	£107,063
2 Year Fixed Standard	£999	0.94	2	£637	£106,853
3-Year Fixed Fee Saver	£0	1.34	3	£658	£100,761
3-Year Fixed Standard	£999	1.09	3	£645	£100,412
5-Year Fixed Fee Saver	£0	1.34	5	£658	£87,498
5-Year Fixed Standard	£999	1.09	5	£645	£86,992
5-Year Fixed Premier Standard	£1,499	1.06	5	£643	£86,931

Using the monthly repayment I then calculated the total paid over the period for each deal. This is the monthly repayment multiplied by 12 and then by the number of years, plus the arrangement fee.

Subtracting the remaining debt from the initial loan amount of £120,000, I get the amount that has been paid off the mortgage at the end of each product’s term.

Show me the money

In the table below, the ‘Total cost’ is then the difference between ‘Total paid’ and the amount ‘Paid off’.

Finally – based on total cost and the amount paid off – for each mortgage option I calculate the true cost for each £1 paid off of the mortgage:

	Monthly	Remaining	Total Paid	Paid off	Total Cost	Cost per £
2-Year Fixed Fee Saver	£648	£107,063	£15,552	£12,937	£2,615	0.20
2-Year Fixed Standard	£637	£106,853	£16,287	£13,147	£3,140	0.24
3-Year Fixed Fee Saver	£658	£100,761	£23,688	£19,239	£4,449	0.23
3-Year Fixed Standard	£645	£100,412	£24,219	£19,588	£4,631	0.24
5-Year Fixed Fee Saver	£658	£87,498	£39,480	£32,502	£6,978	0.21
5-Year Fixed Standard	£645	£86,992	£39,699	£33,008	£6,691	0.20
5-Year Fixed Premier Standard	£643	£86,931	£40,079	£33,069	£7,010	0.21

(Please refer to the tables above for rates and fees for each product)

Looking across all of the deals, none of them are significantly different enough to have a life-changing effect on my finances.

It is scary when you work it out like this though. It’s costing me at least 20p for every £1 that I pay off my mortgage.

But don’t panic. Go back and reread the section ‘Should I pay off the mortgage?’ for some perspective.

What am I going to do?

Last time I renewed, I fixed for three years. I was sure that the interest rate would go up due to Brexit. But I was wrong.

This time I’m even more certain that interest rates will go up. So I’m going to fix the mortgage for five years.

But it doesn’t matter if I am wrong. I’ll sleep well at night having locked in a monthly payment – one that we can comfortably pay and have budgeted for.

However if interest rates do shoot up, I’ll be unbelievably smug for the next five years. That alone is worth the risk!

You can see all The Dink’s articles in his dedicated archive.

1. Financial Independence Retire Early.[↩]

What caught my eye this week.

I am recovering from an excellent wedding that ended late last night (not my own!) so straight into the links this morning.

Except to observe that people of all ages do seem very happy to mix again.

And that commentators who asked last summer “Will we ever be comfortable at a party again, post-Covid?” might have been bemused to see half a dozen pensioners crowding together into one of those comedy prop-strewn instant photo booths.

Of course that’s not to say that was necessarily wise behaviour for their age bracket in the midst of the ongoing Delta spread – nor to deny that there are limits to the double-jabbed vaccination protection that made this wedding possible.

More that the human spirit has strong reversion-to-the-mean tendencies.

Investing accordingly, I think.

Have a great weekend!

[continue reading…]

Okay, confession time. This SIPP money saving hack won’t change your life. But it could be worth the price of a nice meal out every year.

If I was a better intro writer I’d also highlight it might save you up to 82% on your SIPP fees – which will certainly be true for a few readers.

Either way, it’s surely better to have every pound working for you rather than for the Military-Financial complex, eh?

SIPP money saving in a minute

This tip should only take a couple of emails to sort. It will help two groups of people.

• Firstly, anyone who is not maxing out their pension annual allowance and is not using their platform’s SIPP account to pay their fees could benefit.

You could be paying anything from 25% to 82% extra in foregone tax relief if your platform takes your SIPP fees from a linked dealing account.

• Secondly, anyone who is maxing out their annual allowance and is using their platform’s SIPP account to pay their fees.

In this latter case you can grow the tax-free space in your SIPP faster by paying your fees from a linked dealing account instead.

This was me for a few years because I didn’t know I could pay my SIPP fees from a non-SIPP account.

Annual allowance headroom step-by-step

If you’re not maxing out your pension annual allowance then pay your fees from your SIPP account.

• Set up your monthly direct debit on your SIPP account.
• Instruct your platform to take fees from your SIPP account first.
• If your platform won’t facilitate this request then don’t fund any account other than your SIPP. Leave enough cash in there to cover your fee. They’ll soon take it.

How much can you save?

A basic-rate UK taxpayer makes a 25% saving by using pension contribution tax relief to help pay their fees.

They’d save £60 on annual fees of £300, for example.

That’s because they only need contribute £240 to their SIPP to gain £300 after 20% tax relief.

A higher-rate UK taxpayer makes a 67% saving.

So, for a higher-rate payer a £180 SIPP contribution magically pays a fee of £300, after 40% tax-relief.

Some additional tax rate payers could save 82%. Some Scottish taxpayers will save at different rates. Anybody who can salary sacrifice into their SIPP to use this SIPP money saving tip will fill their boots even more.

No annual allowance headroom: step-by-step

If you are maxing out your pension annual allowance then pay your fees from your linked dealing account.

• Instruct your platform to set up a dealing account for you and to take fees from that account first.
• Set up a monthly direct debit on your dealing account to cover the fees.

This way every last pound of your annual allowance can be put to work expanding your tax-advantaged wealth.

Every little bit helps when the Government is shrinking your annual allowance by the inflation rate every year.

Granted, this is like squeezing the last blob of toothpaste from the tube. But who doesn’t do that?

Optimising costs

Relatively minor savings like this will rebound off the incredulity shields of big picture people.

But optimisations stack. The modern world is built on them.

Shave off enough costs like this and they’ll add up like extensions to a money moustache that grows bushier every year.

And of course, optimisation is a psychological comfort and motivator for detail hounds like me.

The originator of this SIPP money saving hack

I can’t sign-off without mentioning that Monevator reader Steve alerted me to the fact that his platform actively made it difficult for him to pay his fees from his SIPP.

I’ve never had this trouble from my platforms. But I did lose out by forgetting to switch my direct debits back to my SIPPs once I stopped maxing out my annual allowance.

Please let us know in the comments if your platform makes it difficult for you to save on SIPP fees – or any other costs.

I’d like to update our broker table with these extra nuggets that passive investors need to watch out for. Reader feedback helps.

Two hidden costs that platforms don’t advertise come instantly to mind:

1. Some platforms aren’t transparent about the currency exchange fees you’ll pay on dividends from funds invested overseas.

2. Many platforms advertise a low dealing fee for regular investing. For example, they say you’ll only pay £1.50 to buy an ETF on a monthly schedule versus £10 to trade whenever. That’s great, but watch out for costly catches.

For instance, some platforms restrict the choice of products available in their regular investing scheme. And some make it hard to undo the commitment.

In contrast one of my platforms lets me chop and change my regular investments every month, or to take a break anytime. So obviously that’s the one to go for if you expect to lean heavily on this feature.

Please add your experiences in the comments so we can create a checklist of questions to fire at new platforms before you transfer to them.

Take it steady,

The Accumulator