Will paying this off our mortgage make any difference?

purpleems

Hi Everyone

Bit of a newcomer on here (although lurking and learning for a long time!). I have a bit of a query that I wondered if you knowledgeable people could help me out on?

I have read and researched the relevant articles on here but I'm not 100% sure that I get it! Anyway, here goes....

We have a mortgage of £125k over 33 years at 6.33% fixed for 2 years (runs out in Dec 09). We moved and added £5k onto the mortgage to enable us to get a bigger house which is fixed for 2 years (closest we could get to tying up with main mortgage amount fixed rate ending) at 7.49% (higher rate cos no arrangement fee). We are due an amount of £4k any day now and I am wondering what to do with it. The house needs a new bathroom desperately which was what we were originally allocating the £4k to (plus some updates in the kitchen - new doors, worktop etc). Now I am wondering whether it is worth using that £4k to pay off some of the mortgage so that when we come to remortage next Dec we owe less, but I'm not actually sure it will make that much difference. I should say that with the extra £5k we borrowed it takes our total ltv to 83%. And we are also overpaying by £200 per month.

I think I've mentioned everything but please feel free to ask questions should anything need clarifying.

I would be most grateful for any help and advice as we are trying really hard to get our finances in order during this difficult time

Kind Regards

Em x

zekepes

I don't really know, sorry, but I cannot think it would make that much difference. You may get more responses on the mortgages board as to how it will affect remortaging.

If you are going to do the bathroom/cupboards anyway, then I would just go ahead and do them.

We kept back £4K to do our bathroom this year (it has been in desperate need for years and I just cannot put it off any longer), rather than overpaying the mortgage more and tbh I really didn't want to spend it - I would much rather pay off the mortgage! Needs must sometimes.

purpleems

Thanks for the reply Zekepes. I have to admit that I wasn't sure it would make an awful lot of difference to the mortgage as a whole and might be better spent improving things within the home.

I feel exactly the same as you - I have real difficulty spending any spare money and all my leanring from this site is tellingme to put it on the mortgage!!

Thanks again for the reply - I'll try posting on the mortgages thread as well to see if anyone there can help x

bunking_off

Long mortgages = lots of interest. Anything you can do to cut your term will save you money in the long term.

To make the calculation easier, I've ignored the extra £5k you've added onto your mortgage and just taken a £125k mortgage over 33 year term, starting today. At 6.33% interest (assume constant over the period), you'll pay just short of £148k in interest payments. If you paid £4k off it so it was a £121k mortgage instead, keeping your payments as they were before (ie ask the mortgage company to reduce your term rather than payments - or keep the term the same and religiously overpay the difference), you'll pay off your mortgage in 27.6 years and pay £131k in interest. So your £4k saves you approx £17k.

As you say, if your LTV is lower you'll also have more flexibility when it comes to review.

Down to how much you want a nice bathroom, I guess? Can you not get a budget one and spend some/pay some off?

Obviously, get someone to check my figures....

purpleems

Thanks bunking_off, to see figures like that makes it easier to see that although it seems a relatively small amount, it actually makes quite a bit of difference in the long run!

We will be spending as little on the bathroom as possible (still making it nice though) so I think the idea of spending a little and paying the rest off the mortgage seems like a good compromise.

Once again thanks for all the advice and the calculations you've given
Em

purpleems

Can I just check - if using the £4k to pay off the mortgage of £125k - it doesn't actually take it down to £121k or does it? I was of the understanding that you don't even really touch the capital until some way into the mortgage so by paying off the £4k would it actually only be paying of, say, £2k because the interest gets paid off first?

bunking_off

No, it should come off the capital.

Ordinarily each month when you make a payment, some of it pays the interest, some of it the capital. So if you owe £125k, the monthly interest (assume 6.3%, applied monthly) would be approx £641 and the difference between that and what you pay...let's call that £X (which I'd guess is about £100?)...would be taken off the capital.

Next month, the interest would be applied on £125k minus £X, meaning the interest would be slightly less than £641 so the difference between that and your payment would be slightly more, meaning you pay off more capital. If my guess at X=£100 was correct you'd be paying interest on £124900, so rather than being £641 it would be £640.50, meaning an extra 50p of your payment would go towards the capital rather than interest.

That continues on until you get to the 33rd year, where the interest you're paying is trivial so the majority of your payment goes towards paying off the capital.

All of this happens in background, and all you see is the overall money they take.

Now, if you use your £4k to pay off your mortgage, then it means that effectively you're overpaying your mortgage by £4k for that month. This means the value of X for that month is massive (e.g. £4100 rather than £100), so reduces the balance...my using £121k as the startpoint was just a shorthand for that, as £125k with an overpayment of £4k makes £121k. Each month, you're only paying the interest you've incurred in that month...although you tend to pay more interest early on, it's a gradual transition : you don't pay all your interest for the first few years, then repay all the capital for the last few years...you're always paying a mixture of the two.

Hope that makes sense! Not sure I've explained myself very well...

purpleems

Blimey! Thanks for all that detail bunking_off- it makes so much more sense now. At least I can make an entirely informed decision of what to do - I guess I was just under the impression that the lump sum would be treated like normal monthly payments (i.e.majority towards interest and less towards capital).

It's a shame I can't thank your post more than once as you've been really helpful and thanks for taking the time to work out those figures.

Cheers!:D

bigbloke45

If you are on a fixed rate, have you checked with the lender what the situation would be?

Secondly, it's your home; why not make it more enjoyable to live in it? You've an awful long time to go yet.

Good luck whatever you decide.

angelavdavis

Hi there,

Are you/OH tax payers?

Have you used your ISA allowance?

Check with your mortgage terms as many stop you overpaying your mortgage by penalising you.

It might be worth putting the money into an ISA at least until your mortgage fixed term ends (I am assuming that you are limited with overpayments during this time?). Split the £4k between yourself and your OH to ensure you can invest all of it.

This will stop you spending the money(!) and also, ensure you get the best possible interest rate until your fixed term ends.

purpleems

Just wanted to say thanks to all who replied.

You've really helped me to make an informed decision and we will definitely be investing most of the money into our ISA's in order to pay more off the mortgage when the fixed rate ends

Thanks again to you all
Em x