We take the total cost of your current variable rate mortgage insured with RateGuard over the chosen term and compare this to the amount you'd end up paying with the fixed rate you're considering.
To calculate these costs with RateGuard we find your current monthly payments* from the information you give us about your mortgage, work out how much is interest and how much is capital repayment, and take into account how this is likely to change given the current market outlook for interest rates**. We add to this the RateGuard premium and, again, we factor in any benefit from claims falling due given the current market view on rates. From this we have the net amount you will pay out in mortgage payments and RateGuard premium and the amount still outstanding on your mortgage at the policy end.
The costs of the fixed rate option are calculated by finding the fixed monthly mortgage payments, calculating the interest and capital repayment amounts over the period and then adding any remortgage fees. Again we note the outstanding mortgage balance at the end of the period.
The saving is then:
Fixed Mortgage Payments and Fees - Net Mortgage Payments with RateGuard + Final Fixed Balance – Final RateGuard Balance
* The constant payments P on a loan which is repaid in full can be found from:
P = MB * r * (1+r)n /((1+r)n-1)
MB is the current mortgage balance, r is the monthly interest rate and n is the number of months taken to pay the mortgage balance which is the number of months left on the mortgage for repayment mortgages. For Interest only mortgages, n is infinite and this reduces to P = MB*r as expected.
** The interest rate over the period is modeled by looking at the expected rate of LIBOR at the end of the two or three year term given by interest rate futures on Sterling 3 month deposits traded on Euronext LIFFE and assuming the current spread is maintained between 3 month LIBOR Spot and the 3 month OIS (Overnight Index Swap – this is an accepted proxy for the Bank Rate over an equivalent 3 month period) We make the assumption that the path taken to attain this rate is simply linear, that is, the rate changes in constant monthly steps from the mid point of each monthly interval to the next, starting mid-month and ending mid month.