Savings V's Capital Repayment(Updated 2.12.04)

Angela

I am currently paying 4.75% on my variable rate mortgage.
Could someone just confirm that I am better paying my savings/extra cash into cahoot at the moment rather than doing a capital repayment?
And is this so untill my rate goes over the 5.5% that cahoot are paying?
It looks ok on paper but of course my interest will go down if I do a capital repayment how do I work it out.
I have a big shorfall in my endowments(which are being looked at at the moment)so I need to take some action with the money I have saved since finding this site.

Many Thanks in anticipation of your replies

lisyloo

Could someone just confirm that I am better paying my savings/extra cash into cahoot at the moment rather than doing a capital repayment?

I think there is a factor that you are missing and that is tax.

You have to pay income tax on your savings but you do not have to pay income tax on any money you save on your mortgage.

If you are a basic rate tax payer then Cahoot will deduct 20% of your interest in income tax.
You will therefore receive 4.4% and not 5.5%.

It is the lower figure of 4.4% that you need to compare with your mortgage and you will find that you are better off reducing the mortgage (assuming you pay basic rate tax).

Ifyou are a higher rate tax payer then it gets even worse and you only get 3.3% from Cahoot after tax.

Angela

Thank you for the prompt reply I shall arrange a capital repayment immediately.

Many Thanks,

lisyloo

It is a good idea to leave yourself some cash available in cash of an emergency (redundancy, need a new washing machine, car breaks down etc) especially if you can't get at your capital repayment.

Leia_Stephens

I would second this BIG TIME, according to quite a few experts its advisable to have at least 3 to 4 months "take home pay" as an emergency fund in savings.

Leia

DiggingOut

Hold on, we may be missing something here.

Have you used your ISA allowance, and if not, will you? If you aren't using it, you can get 5.1% with Abbey Postal tax free, which is better than the 4.75% you are paying on the mortgage. So you would be a little better off putting the money into a mini-cash ISA than you would be repaying the mortgage.

Second, if you are married and one spouse is not a taxpayer, you can put the savings in Cahoot in the non-taxpayer's name, and that is better than repayments on the mortgage.

In general, lisyloo's advice is good (as usual ) but the two situations above would be exceptions.

Angela

ISA maxed.
Not married.
Basic rate taxpayer.


Thanks for all your replies.

I knew I could count on you all to cover all eventualities.

Angela

Hi again just reviving this thread again as I have another question.
My % with my mortgage is now 5%.
As previously mentioned I will have a shortfall in my endowments.
I need to put some of my shortage on repayment.
Can I do this with another provider eg another mortgage or do I have to stay with my present provider.
If I can move this part to another provider who and where are offering the best deals.
Many Thanks in anticipation of your replies.

lisyloo

It will be difficult to go with another lender.
The reason is that your current lender has a "first charge" on your property.
This means that if you get repossesed the lender has first bite at the cherry as regards the funds from the sale of the house.

Lenders don't like taking a second charge (as it increases their risk), therefore you are likely to find it difficult or uneconomical (as they will want to charge more).

Either switch part of it and stay with existing lender or move the whole mortgage to a new lender (you can still split it).

Angela

Thanks lisyloo for the extremely prompt reply.
I have a two year tie in with present mortgage,but can do overpayments,cap repayments and change some to repayment etc etc so will have to go with that by the look of it.

lisyloo

You don't have to switch to repayment.
You could choose to simply make overpayments when it suits you.

The upside of this is that it gives you lots of flexibility.
The downsides are that it might not work if you aren't disciplined (might be tempted to spend it instead) and you actually have to actually make the payments as well.

I have an interest only mortgage and no repayment vehicle.
I just make repayments when I like.
This gives me grat flexibility, but only works for disciplined people.