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I've been offered a mortgage for 75,000 for a term of 12 yrs. The interest rate is fixed for 2 yrs at 1.89% and after the 2 yrs, the interest goes up to 3.6% for 10 yrs. But when I remortgage at the end of the 2 yrs, will I still be paying (old lender) the amount that was originally forecast ie 1.89% for 2 yrs + 3.6% for 10 yrs?

ie current offer says when I borrow 75,000 for 12 yrs I will be paying back 94,000 altogether. So, after 2 yrs (when fixed term ends and 10 yrs is left) when I borrow from a new lender and pay this loan, will I still be paying them the 94,000?

The figures above are not accurate; roughly what was in the offer.

ADDENDUM:

I now have more information to substantiate the correct answers by @Hart CO and @D Stanley. I have seen the mortgage illustration (also called the amortization schedule) which clearly demonstrates that the interest I pay for the first 2 yrs is only 1.89% of the remaining amount each month.

The monthly interest = Remaining Amount x Monthly Interest
Remaining amount at first month = 75,000
Monthly Interest = (1.89 / 100) / 12 = 0.001575
Interest at first month = 75,000 x 0.001575 = 118.125

If in the first month, I pay 500 then 
500 - 118.25 = 381.75
381.75 goes towards capital repayment.
So when you come to the next month, the Remaining Amount is only 
75,000 - 381.75 = 74,618.25
  • Are you saying that some of the interest is deferred for 2 years, or are you guessing that you will be accruing interest for 2 years? – D Stanley Feb 13 at 14:19
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    Are you talking about a variable mortgage, and planning to change lenders at the first adjustment? Note - please add a country tag, it might make a difference. – JoeTaxpayer Feb 13 at 14:39
  • @D Stanley, sorry I didn't get your question fully, but I have edited my question to make it clearer. – Sumith Feb 13 at 14:40
  • @ JoeTaxpayer; yes it is a variable mortgage and yes I am taking about leaving at the first adjustment. I have now added a country tag - UK. – Sumith Feb 13 at 14:42
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It depends on the term of the loan.

If the loan is just structured as a step-rate loan that gives you a lower rate upfront and a higher rate later on, then after 2 years you would owe the remaining principal amount (the original 75,000 less the total principal paid in each payment). You would not owe the interest over the remainder of the loan.

If the teaser rate includes "deferred interest", then you would owe the amount of interest that is deferred from your first payments, so you will still owe 75,000 minus the principal paid, plus the amount of deferred interest.

Worst case, if the loan is a "interest-first" loan, then you haven't paid any principal yes, and would owe the total 94,000 minus anything you've paid to date. Those loans are more commonly found as car loans for those with bad credit, though (I've never heard of one on a mortgage).

Most likely you will owe between 60,000 and 70,000 after two years, depending on how the payments are calculated and whether any interest was accrued from the initial period.

  • thanks, I have up-voted. But apparently my vote will show only when I have earned enough reputation :) – Sumith Feb 13 at 15:46
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    UK fixed term mortgages are almost always like the first of your cases. – AakashM Feb 14 at 14:45
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Whether or not you can save money by refinancing after your initial rate expires depends on whether your mortgage terms include a penalty for early repayment (early repayment charges), interest rates in two years, term of the new loan, and how much refinancing costs (appraisal and/or other fees).

If there are no early repayment charges then after 2 years you'd secure a new loan which would satisfy the remaining balance of your initial loan and there would be no obligation to the initial lender after that point. So if you were able to refinance to a lower interest rate for the remaining 10 years you'd pay less than the 94,000 projected from your first mortgage (assuming refinancing costs don't gobble up the savings).

Some people pay more in the long-run by refinancing because they refinance for a longer term to reduce payments now, or because they neglect to properly account for fees. Many more people pay more in the long-run by taking out equity when they refinance (refinancing more than they owed on their initial loan) to satisfy more immediate needs for cash.

Edit: I didn't realize interest-only loans were an option in the UK, but the idea is the same, you'd just not have any reduction in principal at time of refinance. An interest-only mortgage seems like a bad idea for most people.

  • thanks, I have up-voted. But apparently my vote will show only when I have earned enough reputation :) – Sumith Feb 13 at 15:46
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    As you'd expect, in the UK, an interest-only mortgage is not recommended for the property you live in, but is very common for rental properties. – Steve Melnikoff Feb 13 at 16:08
  • A friend in Stockholm explained that the waiting list for a decent rental is so long (literally 10+ years) that it makes more sense to just buy an apartment with an interest-only mortgage. – chepner Feb 18 at 17:02

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