Is Now A Good Time To Reduce My Mortgage?

decadentlywasted

With all the financial stuff going all over the place, I'm wondering specifically:

next March my 2 year fixed rate deal (4.95%) is up. At the moment I have £50,000 in various accounts/bonds paying between 6-6.5% and I use the monthly interest payments to part pay my monthly mortgage payments (can't repay earler 'cos of early repayment penalties). Come remortgaging time, would it be better to use this to pay off some of my mortgage (currently £162,000) or leave it in savings? My gut feel is to pay off the mortgage - at least I know where my money's going then and I'd be reducing my only debt. On the flip side, I also feel that maybe having some cash handy would be a good thing.

Comments welcome - thanks.

pandora205

Someone with more knowledge than me will come along soon to comment on your idea of paying a lump off. I just wanted to mention that you can pay 10% per annum off without incurring a penality usually, plus you can increase your repayments too. I've done this as I'm in a fixed term until next May, doubling my repayments for a few months and paying the maximum off. I'll also pay another lump off in January, as this is the beginnng of the new year.It's amazing how quickly my balance is going down doing this.

You have a very good rate for your fixed rate - mine is higher. I don't think we'll be able to get anything like that next year.

hostman

I'd pay £30k off the mortgage and keep the remaining £20k in cash for a "rainy day".

As you say, lots of unsavoury financial unwinding and it's affecting almost everyone in some way. I'd want some protection from that and £20k in the bank would certainly provide that.

Locoblade

If you want your money to work directly against the loan but don't want to "lose" those savings into the mortgage and not have access to them if need be, you could look at an offset mortgage. Whether it would be beneficial financially will depend on how low a rate you can get when you next remortgage. If its at around 5% or under (as the odd tracker is at the moment), then you might still be slightly better off with the money in savings earning you 6.5% (before tax presumably?) as that works out just above 5% net return for most after tax, but if you're a high rate tax payer you'd need to earn something nearer 8% to make the savings profitable against a 5% mortgage, so offsetting there would definitely be worthwhile unless the mortgage rate was very low indeed.

mark.4-2

Always keep a little liquid cash back; as you say working capital. If you are someone who knows you won't waste it or spend it unwisely, then there's no harm in keeping some, say £5,000, in an easy access savings account. However, paying back the mortgage is always a good thing.

Many people only look at the cost of the interest when calculating the cost of the mortgage. But mortgage lenders are much better than relying just on that to squeeze money out of consumers.

Over the course of a 20 or 25 year mortgage, the lender will offer new deals and new fixed or flexible rates every few years - and every time you renew with them on any sort of deal, many charge an 'arrangement fee'. These are either added to the capital you owe, or charged in cash. Either way, over the course of your mortgage, they will have earned several more thousands in arrangement fees and possibly interest thereon. So don't overlook these fees when doing your calculations, they add up over the years. Being mortgage free is one of the best money saving objectives you can have!

lisyloo

pros:

1) Paying off your mortgage is 100% safe.

2) It's also tax free, so if your mortgage is 5% then your "return" is 5%. There is no tax involved.

cons:

1) it's illiquid and unless your mortgage is flexible you can not necessarilty easily get the money back. Make sure you have a "rainy day" fund. You might want this to be 3 months income (or living expenses) to ensure you can manage a job loss.

2) It might not get the best return, for example my mortgage is 4.99% but my cash ISA pays 7.32%. This depends on the rates but also the tax status of the two things you are comparing (ISAs are tax free of course). Right now you may get a very good return (long term) on stock market investments but of course that is speculative. If you want low risk there are some very good cash ISA rates (like 7.32%) with negligeable risk (covered by FSA scheme).

3) There might be good tax reasons to save/invest elsewhere.
For example ISAs are tax free for life whereas you can only make tax free savings for the term of the mortgage. In my case life is estimated at about 40 years but mortgage term is about 8, so there could be a substantial difference.
Also pensions give you either 20% or 40% tax relief on your contributions so that's another potential avenue for your money, although of course there are other things to take into acount here (like serious illiquidity).

getmore4less

Long term plans should include ISAs a use or lose long term tax free allowance.

Anything in ISAs think before cashing in and consider using the full allowances each year as well.

Contingency for loss of income is very important, I would lean towards the full years expences as we head into a possible resession.

This give time to try and get another job or re evaluate, take on anything/new career.

The two can be combined if using cash ISAs, with perhaps a bit outside if you are using the full allowance and might get new income quickly.

decadentlywasted

Cheers for the quick replies - much appreciated.

Much food for thought - I knew about the paying off up to 10% (done that already for this year's allowance) but I didn't know I could overpay. I'll look into that.

Offsetting is something I'd have to look into - on the surface it seems like a good idea.

I'm all maxed out on ISAs until April too, but defo an option for a bit of rainy day money (no change of squandering it - far too sensible/tight!).

My gut feel at the mo is to keep a bit of a cash reserve and put the rest towards the mortgage. I know it may seem a bit pessimistic but, having had my fingers burned with Icesave, I'm a bit dubious about leaving cash anywhere right now (except maybe under the bed), regardless of what rate I'd get!

Re. the arrangement fees: I always pay upfront and do a few sums to see if the fee is worth paying when compared to how much I'd save over the fixed/discounted rate.

Locoblade

In case you've not looked into offsetting before, financially it works out the same as paying off a chunk of the mortgage, but practically the offset pot is always there if you need to draw funds from it, so it doesn't tie up the money in any way.

lisyloo

The two can be combined if using cash ISAs

This is a really good point.
We have most of our rainy day money in cash ISAs so it benefits from being safe, liquid AND tax free, so that's a pretty good combination.

I'm a bit dubious about leaving cash anywhere right now

Don't go too over the top.
Money in banks is guaranteed by the government up to £50K.
If the government goes bust we'll all be in trouble and even having cash stacked under the bed might not help in that case.
I know there has been a lot of bad press, but providing you don't exceed the £50K limit in an bank (per person) then it's really very negligeable risk.

darktrader

Assuming this is all of your cash savings:-

Retain £10K

Reduce mortgage by £40K

Keep monthly payment at current level as a monthly overpayment - reducing the mortgage further each month. (Make sure the "New Deal" allows overpayments.)

Once you have no mortgage life is even sweeter