Release equity to pay off mortgage quicker (what do you think)

StrawberryJam_2

Simply: Has anyone released equity (for that 'home improvement') and put it into savings.

I could release 10k equity from my HSBC tracker mortgage (currently sitting BOE +0.24%) and simply put it into an existing esaver with A&L that has a net 4.65%. While keeping my mortgage term the same, and allowing my monthly payment to increase/

is my thinking correct in saying I will be £141 better off in the year (assuming rates stay same?) (10000 * (0.0465-0.0324) = £141)

Drawbacks: firstly 3-5 days transit loss of interest when I decide to return the £10k+interest money to the mortgage. Secondly the esaver is flexible to withdrawals (with a few conditions - ie loss of interest on any withdrawal in that month, therefore withdraw it on the 1st of the month to lose no interest)

My ultimate aim of the tracker mortgage is to pay the debt of sooner rather than later. What do you think? Just leave the mortgage as it is and make this ‘overpayment’ into the savings, or release money from the mortgage and contribute with my ‘overpayment’ ie juggle between my mortgage (debt) and savings (to benefit)

I have not overpaid my mortgage this year, as it has been better interest rates to save money as opposed to pay off the mortgage. With the recent drop of 1.5% on my mortgage, thankfully the savings has only dropped by 1% or thereabouts.

Anyway, I shall not be overpaying my mortgage for now. Anyone who does over pay a mortgage is silly (i think)... as you are receiving better returns on saving net rates, and that’s where my additional payments are being placed for now. When the day comes that mortgage rate increases I will have a lump sum to pay from my eSaver.

There maybe others in the same position pondering
http://forums.moneysavingexpert.com/...html?t=1290165

MrMicawber_2

Loads of people mainly in their 60's took Equity Release products in the 90's and invested just before the tech bubble burst. They lost a lot of money.

What you are talking about (borrowing to save as opposed to borowing to invest) is much safer and I also make your saving £141 lessened a bit by the few days loss interest at either end.

You could still get caught out if your mortgage did not allow you to pay the full £10k off if the savings rates reduced or the mortgage rate increased. E.g. lots of mortgage products only allow a limited capital repayment of 10% of the balance.

It's a slightly sweeping statement to call people who are making overpayments now silly.

Even with a positive savings rate margin it's not a no brainer because we don't actually know how interest rates are going to move and it is possible to get it a bit wrong. What price do you put on peace of mind and certainty and what price do you put on the absolute simplicity and clarity of making an overpayment. Different people have different values for these. So, while your arrangements look good I wouldn't knock others for taking a different approach.

StrawberryJam_2

MrMicawber wrote: »

if your mortgage did not allow you to pay the full £10k off if the savings rates reduced or the mortgage rate increased. .

a tracker mortgage product that I have allows unlimited overpayments, and as such think the concept of taking equity for short term savings account could be beneficial? for the short term at the very least/ has this concept been discussed elsewhere?

MrMicawber wrote: »

Even with a positive savings rate margin it's not a no brainer because we don't actually know how interest rates are going to move and it is possible to get it a bit wrong. It's a slightly sweeping statement to call people who are making overpayments now silly..

I didnt mean people are silly, just that the decision may be silly to overpay the mortgage on the basis that rates on savings are higher than the majority of tracker rates for the time being (if you have been lucky).

I think a re-assessment is needed monthly to how to approach being mortgage free. It is my re-assessment that has got me wondering whether £10K extra added to the mortgage and £10K in savings is a like making up my own offset?
I do get the impression that I am missing something though/

Incisor

StrawberryJam wrote: »

... I do get the impression that I am missing something though/

Yes, you are missing the fact that everyone will pile in and do this once they catch on, driving interest rates on savings products downwards. In other words, either it won't last, or the margin in your favour will become too pathetic to worry about.

MrMicawber_2

Yes - it's like doing your own offset - in fact better so long as you keep a net postive margin and it might work well for you given you are checking frequently and your mortgage allows you to pay off as much as you like whenever you like. Are there any costs involved with releasing equity from your mortgage?

Floxxie

Yes I'm drawing £35k and putting it into various savings accounts. I have a reserve account so it is not costing me anything to drawdown the money or pay it back.

My mortgage is currently 3.48% so it makes sense to be making more in interest elsewhere than I will be paying. If my mortgage rate becomes higher than the savings rates then I shall transfer the money back in.

I am still aiming to pay off my mortgage but the interest rate cut has made me consider how I do it best.

Floxxie

StuartGMC

Interest rate is one consideration but not the only one; care should be exercised in terms of the amount of savings you hold because, in the event of redundancy these can affect your ability to claim benefits and you can't pay back into mortgage (deliberate reduction in your assets arising from this).

Presently we offset so once the new rates start in December our equivalent rate (which accounts for interest lost etc) will be around 1.9% max and 1.45% min in the month. However, I still intend to clear mortgage more than 9yrs early but, we are also saving plus continuing to invest in markets (long term) whilst they are cheap. A balanced portfolio should always be considered.

Release equity and place in secure saving so you can recover when you need it, but beware of the possible pit-falls in the present economic environment.