Am I doing the right thing?

oompahloompah

We have a lump sum to pay towards our mortgage of £20K, mortgage currently £65K. However when I called the building society yesterday they advised that there is a is a penalty charged, which in this case will cost around £160. I'm assuming it is still worth our while repaying as we will be charged much more than this in interest and we will earn much less in a savings account, but as my brain is still in holiday mode I just need this confirmed
Thanks everyone!!

StuartGMC

Check the calculator on Egg, it will show you the interest saved for the lump sum but do remember to calculate the interest you could earn from it also.

If you have your rainy day fund (3-6x monthly income) and no other debts/expected spend (like car, holiday, guttering & soffits, kitchen etc) then you may want to put all into the mortgage depending upon your interest rate and tax band.

Is the penalty also applied to monthly over-payments? If not, then you could place the remaining balance after above, in a high saving rate fund and that for 12months use in an "accessible account" so it can contribute to regular overpayment.

ailuro2

http://www.moneysavingexpert.com/mortgages/mortgages-vs-savings

is MSE Martin's explanation.

I suggest you pay £5K a year and invest the rest somewhere just as profitable. It all depends on the interest rate you're paying- it sounds like you are on a fixed term deal, in which case it shouldn't be too hard to beat your mortgage interest rate. Remember £3600 per person in a cash ISA too.

Rebob

I would pay the 5k straight away and then ask the bank if you are allowed to increase the monthly payment and later take it back to the original amount.

bigbloke45

Calculate how much a year you would save on your mortgage if you paid off 20k. At 6.00% it would be £1,200.00, take off the £160 and this looks like a good deal to me.

If you put the £20k on deposit, you would need to "Gross Up" the interest you would carry on paying on your mortgage to see if it would be worth not paying off your mortagage.

If you are a basic rate (20%) taxpayer, you need to divide your mortgage rate by 0.8 to see what rate of interest you need to earn to be better off than paying off some of your mortgage.

For example, if your mortgage rate were, say, 6.00%, then you would need to earn a rate of 6.00%/0.8 which amounts to 7.5% gross interest. You aint gonna do it!

Try dividing your mortgage rate by 0.8 and see what gross interst rate you come up with. Then take of the £160 and see if it's worth it. I suspect not.

Have a try and come back to us.

Good luck!