Remortgage Query

Galaxy863

Hey all,


I'm new to the site and after a bit of advice. I'm currently on a fixed rate mortgage which runs out in May 2009 ( the rate is fixed at 5.19% ). I've decided to save as much as I can as a deposit for when I have to remortgage, although it won't be a great deal ( around £4500, the amount I would have left on my mortgage is around £109,000 so it would reduce it to £104,500 ).

I don't know whether it's better to put this towards my new mortgage or make a lump sum payment off my current mortgage ( I've checked and I can do it without any fines ). I'm of the opinion making a lump sum payment may be a better idea as the interest is recalculated immediately so in theory I'd be paying more off the capital each month.

Any advice would be greatly appreciated.

lisyloo

I would put it into a cash ISA.

You will get more than 5.19% but more importantly you will have flexibility as to what to do with it.

If it is in an ISA you can use it for emergencies e.g. job loss OR paying off the mortgage (if it's gets you a better deal) by changing your LTV OR you can keep it there if the ISA rate beats the mortgage rate.

So I think you are best off keeping your options open for now.

Galaxy863

The only thing is I dont actually have the money together now, its how much I will save by the time my mortgage deal runs out. If I decide to pay the lump sum off now then my parents have agreed to loan me the money to do it.

On a seperate note I have accident, sickness and unemployment insurance should the worse happen and I lose my job so wouldn't need the money for that.

lisyloo

The only thing is I dont actually have the money together now

That's no problem.
You can save or pay off the mortgage as you go along.

If I decide to pay the lump sum off now then my parents have agreed to loan me the money to do it.

That's very generous but I wouldn't do it.
The money is committed (unless you have a flexible mortgage and can get it back) so you are totally committed to pay your parents back whatever happens and personally I think the flexibililty is better.
You will till get more than 5.19% in an ISA so mathematically it's better.

On a seperate note I have accident, sickness and unemployment insurance should the worse happen and I lose my job so wouldn't need the money for that.

Well I think you might find you have some "deferred periods" i.e. they don't pay out immediately, but there are other reaons why it's good to have an emergency fund e.g. boiler breakdown, car trouble, car crash etc.
You might have insurance for all of those but there will be excesses, limits and deferred periods etc.
It's impossible to insure for every eventuality even though you seem to be well covered.

hydsta

I don't know how many years left on your mortgage but if you just took it out recently, then by paying off £4500 now, even though you would be paying less interest on a now lower mortgage balance, you wouldn't be paying a a lot more capital off. In the early years you're paying more interest than capital.

You said you will have £4500 by May 2009, i assume you'll be saving upto that amount throughout the year. The main issue here is making that money work as hard for you as possible. Putting it in an ISA will generate more returns for you rather than paying some of the mortgage off and saving in interest. Basicly the amount of interest made will be greater than interest saved on your mortgage. Also as stated, if you're in the early years of your mortgage and you pay that amount off, you'd only be paying slightly more capital off.

The only drawback of the ISA option however, is you can only put in £3600 in any tax year. Assuming you've not contributed anything into it already this year, this would still leave £900 spare. You could always open another savings account for the extra left over.

You would really need to sit down with your mortgage statement, current ISA rates and work out the math. If you want to pay off the mortgage with your savings at least make sure that you would be saving more in interest than you would be gaining in an investment product. Also if you cant invest most of the £3600 ISA allowance, you should consider you tax position in investing in taxable investment products as this could offset any benefit of saving rather than paying off the mortgage.

Come next year, if your LTV is too high too secure a good rate when you remortgage you could then at that point use your ISA savings to pay some of the balance off.

Galaxy863

Thank you for the responses and advice. I have decided to put the money into a savings account for now.

I had worked out my sums slightly wrong, I am aiming to save £5000 which will reduce my mortgage to £105,000. I think my house will be currently valued at around £120,000 ( based on the house next door which is virtually identical which has just sold for this ) giving a LTV of 87.5% currently ( I am aware this can and probably will change ).

I took my mortgage out 2 years ago over a 35 year term as at the time it was the only way we could afford the repayments. The type of remortgage deal I am thinking of going for is the HSBC remortgage tracker rate @ 5.79% which will increase my monthly payments from £579.64 to £600.31 if I took the mortgage out over 33 years. However, I am thinking of dropping the term to a 25 year one which would increase my mortgage repayments to £670.88 which we can now comfortably afford ( we have a joint income of £39,200 ).

I just wanted some advice as to whether people think this would be a good idea or not? We always intended to reduce the mortgage repayment term when we could afford to do so as at the moment we are barely touching the capital we owe.

Obviously if the interest rates go up our mortgage will too, and looking at our finances we could afford to pay up to around £800 ish a month ( which would equate to the BOE base rate going up to around 7% ).

Any advice/ observations would be appreciated