Remortgage question and what to do with lump sum.

Steameh · 10 October 2016 at 2:29PM

Afternoon all,

I've just found out that my Grandma is giving all us grand kids £2,500 and I'm in two minds what to do with it. I want to use it wisely.

I'm 4 months deep into a 30 year mortgage on a 2 year fix. I was a first time buyer with only 5% deposit so my interest rate is pretty high and I plan on overpaying on my mortgage where possible to bring the term and the amount of interest I pay down.

Firstly, how does it work when you remortgage? Do they take into account the property value vs the amount you're borrowing? Or is it simply, you needed 95% of the house price when you bought it, you now need 93% regardless of it's value today?

Secondly, I'm not sure what to do with the money. I can pay a lump sum which would knock a year off the term and save £6,000 in interest, or do I spend the money increasing the properties value (new boiler, replacement double glazing, kitchen)

Thanks

spadoosh · 10 October 2016 at 2:45PM

What to do with the money depends on your current situation. Are the improvements due anyway? Is there anything set aside for those inprovements? Do you have an emergency fund?

Remortgaging will depend on what you choose to do. If you remortgage with the same bank youll tend to find its a pretty straightforward thing. Theyll work out how much youve paid and youll have a new LTV (likely) based on your purchase price. IF you think the property has increased a considerable amount in that time you can ask for the property to be revalued (costs can be involved) and they will reassess on the new value. If you go with a new provider, it will be a similar process to when you bought the property (minus all the house buying things).

A side note. People really do tend to have a habit of overstating there house worth, either through some optimistic hope, unrealistic expectation or sheer delusion. Its always helpful to be as prudent as you can be, mitigates troubles later on. Theres also a misconception that certain works add value. The reality is certain works need to be done to maintain value. So whilst you might need a new boiler and your house is worth £xx amoutn it will not suddenly be worth £2-3k extra because youve had the boiler replaced. If your bathroom needs replacing it means your house probably wouldve sold less than the 'market value' as opposed to youve just spent £5k on a new bathroom, so add that to the property value.

A good bulk of your current mortgage will be made up of interest owed. At the moment you say youre on a higher rate so a good portion of what you owe is say 5% worth of interest. £2,500 will not make a big impact into that. Should you come to remortgage and find you have a much better interest rate, lets say 3%, The £2,500 will have a bigger impact against that portion of interest if that makes any sense. So the £2,500 could have a bigger impact if saved correctly and offset against a cheaper interest rate. Or it could be better to over pay now. It will depend on your mortgage, the amounts, the interest and your preferences.

M5captainmac · 10 October 2016 at 2:53PM

If your mortgage allows overpayments (most do) then if I was in your shoes I'd overpay with the 2500 lump sum - Look at it this way, its £2500 off your mortgage that you will never pay a penny of interest on again. Plus its £2500 that you weren't expecting so you won't miss it and it will be doing you good for the future.
Thats just my thoughts though and I'm sure others will have differing viewpoints.
Good luck with whatever you do with it though.

lee111s · 10 October 2016 at 2:55PM

Steameh wrote: »

Afternoon all,

I've just found out that my Grandma is giving all us grand kids £2,500 and I'm in two minds what to do with it. I want to use it wisely.

I'm 4 months deep into a 30 year mortgage on a 2 year fix. I was a first time buyer with only 5% deposit so my interest rate is pretty high and I plan on overpaying on my mortgage where possible to bring the term and the amount of interest I pay down.

Firstly, how does it work when you remortgage? Do they take into account the property value vs the amount you're borrowing? Or is it simply, you needed 95% of the house price when you bought it, you now need 93% regardless of it's value today?

Secondly, I'm not sure what to do with the money. I can pay a lump sum which would knock a year off the term and save £6,000 in interest, or do I spend the money increasing the properties value (new boiler, replacement double glazing, kitchen)

Thanks

A boiler/windows and kitchen will probably not increase the value of the property, however if they're needed and will make you more comfortable in your home, then I'd say it would be using the money wisely.

It really is your choice and what you think is best for your situation.

The way remortgages work is that the new lender will do a valuation on the house (usually just a driveby one) and the LTV will be worked out upon how much they value the house against how much you're looking to borrow from them.

Steameh · 10 October 2016 at 2:56PM

spadoosh wrote: »

snip

Needed in the near future but not desperate. The windows are the original wooden framed double glaze, they do leave a lot of condensation on the inside now it's cooler outside. Same with the boiler, it's the original at 21 years old. I see your point about not actually increasing property value though.

At the moment I have zero saved up, no emergency fund or anything set aside for improvements. I'm still buying the internal bits and bobs at the moment so it's difficult to put money away.

Ah right, I was under the impression any over payments cleared the balance, not the interest.

lee111s · 10 October 2016 at 3:02PM

spadoosh wrote: »

A good bulk of your current mortgage will be made up of interest owed. At the moment you say youre on a higher rate so a good portion of what you owe is say 5% worth of interest. £2,500 will not make a big impact into that. Should you come to remortgage and find you have a much better interest rate, lets say 3%, The £2,500 will have a bigger impact against that portion of interest if that makes any sense. So the £2,500 could have a bigger impact if saved correctly and offset against a cheaper interest rate. Or it could be better to over pay now. It will depend on your mortgage, the amounts, the interest and your preferences.

This is absolute rubbish.

Making a lump sum overpayment will come off the capital balance owing, therefore immediately reducing the interest charged on the outstanding balance.

OP, if you decide to over pay, then do so as soon as you can. The sooner you owe less, the sooner you pay less interest. Unless you can get 5% on that £2500, which I doubt you can, then making the overpayment now is the most financially sensible option.

Mogley · 10 October 2016 at 4:05PM

As you haven't got an emergency fund, my opinion is to keep your windfall in a Nationwide Flexclusive Current account. You can keep £2500 in this account at 5% interest for 1 year. Make sure you are aware of the terms of the account (must pay in £1000/month but this can be done by doing a transfer in and out of another account like your own current account on the same/next day).

You can then decide what to do with it after a year (look at other similar accounts when the time comes) but at least it's available for an emergency eg. your 21 year old boiler failing unexpectedly. If not used for emergency in that time consider using the £2500 + interest gained to decrease your LTV when the remortgage time arrives.

NB this strategy is only good if your mortgage % rate is less than the interest rate on current/savings account. I am also basing it on very limited information and you maybe better served paying off other debt first.

AnotherJoe · 10 October 2016 at 5:09PM

Mogley wrote: »

As you haven't got an emergency fund, my opinion is to keep your windfall in a Nationwide Flexclusive Current account. You can keep £2500 in this account at 5% interest for 1 year. Make sure you are aware of the terms of the account (must pay in £1000/month but this can be done by doing a transfer in and out of another account like your own current account on the same/next day).

You can then decide what to do with it after a year (look at other similar accounts when the time comes) but at least it's available for an emergency eg. your 21 year old boiler failing unexpectedly. If not used for emergency in that time consider using the £2500 + interest gained to decrease your LTV when the remortgage time arrives.

NB this strategy is only good if your mortgage % rate is less than the interest rate on current/savings account. I am also basing it on very limited information and you maybe better served paying off other debt first.

^^^this (or any other similar high interest account) and then the other stuff.

Its all well and good paying the mortgage down a little but it will make an insignificant difference to your monthly payments and then when the boiler blows up on Xmas day, you'll be borrowing money on high interest credit cards as you've got no savings buffer.

Rule of thumb is 3-6 months, I'd guess £2,500 is 2 at most, and probably closer to 1.

Once you've got some money put by for that proverbial rainy day, only then look at overpaying.

muhandis · 10 October 2016 at 5:24PM

In your place, I would plonk the £2,500 in a current account that earns me at least (or as close to as possible) as much interest as I'm paying on the mortgage to start building an emergency fund.

As long as the money is sitting in an account that pays you close to the interest rate charged on your mortgage, that is effectively no different to overpaying with respect to interest saved. Plus you have access to the money if required (which can be a negative if you get tempted to spend it, what with Christmas round the corner).

Steameh · 11 October 2016 at 9:51AM

Thanks for all the input. I guess in my situation putting the money into a savings account would be most beneficial. The 5% current account tops what I'm paying in interest.

Mogley · 11 October 2016 at 1:11PM

A correction on my part. The Nationwide account paying 5% is a Flexdirect account.

Remortgage question and what to do with lump sum.

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