Firstly to give a level playing field you need to make two assumptions:
- You have decided on the type of rate Fixed or Variable e.g. both products will be the same (see previous article) To fix or not to fix.
- You would like an interest only mortgage
Next you need to decide over what period of time you would like to compare the cost of the products. You need to consider longer term strategy that will affect your mortgage decisions such as plans to raise capital, pay lump sums off, sell, remortgage etc.
In this example I will compare products over a 5 year term for a £100,000 loan amount
3 year product term at 4.29% with a reversion rate of 5.99%
2.5% arrangement fee added to the loan
£100,000 x 2.5% = £2500 therefore total loan amount = £102,500
Total interest paid = (102,500 x 4.29% x 3 years) plus (102,500 x 5.99% reversion rate x 2 years) = 13191.75 + 12279.50 = £25471.25
Therefore cost over 5 years = £25471.25 interest plus £2500 arrangement fee = £ 27,971.25 total
5 year product term at 4.99% with a reversion rate of 5.65%
£999 arrangement fee added to the loan
Total loan amount = £100,000 + £999 = £100,999
Total interest paid = £100,999 x 4.99% x 5 years = £25199.25
Therefore cost over 5 years = £25199.25 interest plus £999 arrangement fee = £26,198.25 total
In this example not only is product 2 cheaper over 5 years, but the loan amount you will be paying interest on beyond this term is £1,501 less thus increasing the saving over the long term.
To find current products, costs, terms and how much you can borrow try our free buy to Let mortgage calculator