Hopefully a nice easy question about paying off mortgage..

dannyboyslim

Hi all,

First time poster here, and since this board seems full of very switched on people thought I'd just ask for advice on my current situation.

Ok, I own (leasehold) an apartment, and the current state of play with it is that I owe Northern Rock £104,000 on a SVR.
I originally borrowed £108,000 to buy the property in 2005, £100,000 for the apartment and £8,000 to consolidate a car loan and a little bit of money for the apartment itself (I had no deposit). I'm kicking myself a lot for doing this, I wish I had only got a mortgage for the apartment itself, but can't beat my self up over a bad decision and have learned from it.

At the peak of the prices in 2007 my apartment was valued at £110,000 to £115,000, but now in September 2008 when I looked around for a better deal I had a valuation and the price was reckoned to be about £100,000. So because of the negative equity situation I would have needed to put in around £9000 to just get another deal, so I stayed with Northern Rock on a SVR.

This has proved to be a blessing in disguise what with the recent drops in interest rates (although I'm well aware this could change).

I live with my girlfriend and we are both able to save a fair bit, and we are both very keen to move out and get a house together, but as we all know, the problem isn't how much we can borrow, it's how much the banks will lend us. We both earn good salaries and under the "old" system of mortgages based on salary we would have been able to borrow up to £240,000 - we are actually looking in the £190,000- £200,000 bracket and a mortgage based on this amount even at it's most pragmatic rate would be affordable to us. My girlfriend already has her side of the 10% deposit - in fact she has enough to pay the whole thing, but because I've been paying out for the privilege of owning the apartment I don't have a lot at the moment, and I'm not comfortable with her paying over and above her share.

However, we (or rather I) also have the issue of the negative equity on the flat, because not only have I got to save for a deposit, I would also have to make up any shortfall on the sale of the apartment. My question is this..

I'm in a position now where I can save £8000 by September next year, but should I use the savings to pay off more of the Northern Rock Mortgage, or should I keep the money for a deposit in a savings account? What would leave me better off?

I've got a mini-cash ISA and a normal savings account with my bank.

beecher

You're going to have to have enough money to pay off the NR mortgage and pay a deposit. So you need at least £4,000 if you manage to sell your apartment for £100,000, and £19,000 for a £190,000 mortgage. The longer you leave selling, the more money you'll need as prices are likely to come down.

dannyboyslim

That's why I'm wondering what is best to do with the money I've got spare every month, overpay the mortgage (and reduce the Negative Equity) or save it?

The way I see it, if in September next year I have £8000 saved, and my flat sells for £96,000, then I'd probably be left with £1000 (assuming I would have roughly a debt of £103,000 by then, as it's a repayment mortgage).

If I over pay the mortgage by £8000, then when the flat sells for £96,000 I'd have a £1000 profit from the sale (again with the fact it's a repayment mortgage I would have paid off a bit more of the mortgage so my mortgage would only be £95000 ish.)

So in theory as I see it there's no difference whether I overpay the mortgage or save it, because either way it's money I will have to pay.

However, will my monthly mortgage payments reduce the more I overpay? This is basically a question about where my savings would be better off reducing the debt (mortgage), or putting into a savings account?

MORPH3US

Hi Danny,

You say that you could both easily afford the £190,000 - £200,000 mortgage but that assumes you both still have jobs. At this time that is a big assumption to make with people losing jobs left, right and centre.

My other question is how much do you both earn.... I would assume a combined salary of £60,000+ to consider getting a mortgage that big.

As an alternative, can you not stay where you are now. You don't say how big your apartment is, but surely its big enough for you and your girlfriend?

You are already facing negative equity on your apartment and buying a house in the near future would almost certainly see you back in the same boat immediately.

beecher

If you can get an interest rate higher than your SVR, then put the money there. If not stick it into your mortgage. There are spreadsheets available online to show you how your repayments will impact on your mortgage repayments.

http://forums.moneysavingexpert.com/showthread.html?t=1157173

is a good place to start

Joe_Bloggs

The spanner in the works is how much will you get for your existing property. You can monitor what other properties in the same area sold for by using various sites that have a link to the land registry. Consider https://www.upmystreet.com as a source for a guide to what price a property went for. There may be other similar sites.
J_B.

silvercar

The silver lining is that if prices continue to fall, you new place will cost you less and a 10% deposit on the new place will be lower.

dannyboyslim

Well it looks like overpaying the mortgage might be the way to go, as I'm currently on 5.84% with that - although I've read that after the recent rate cut Northern Rock will be reducing this by half a percent to 5.34%.
I have a Mini Isa which is around 3% and then a online savings account which is 2.5%.
So it would be more beneficial to try and pay off a chunk of the mortgage, and maybe try and get some positive equity that way?

dannyboyslim

Oh, thought occurs though, if I keep the money in my savings accounts at least I would have an emergency fund in the advent of something bad happening, whereas it would tied into the home if I overpaid the mortgage. Keeping it in a savings account would give me more flexibility wouldn't it? I could always pay off a lump sum on the mortgage if I felt the need to "chip into the debt".

feisty1

dannyboyslim wrote: »

Oh, thought occurs though, if I keep the money in my savings accounts at least I would have an emergency fund in the advent of something bad happening, whereas it would tied into the home if I overpaid the mortgage. Keeping it in a savings account would give me more flexibility wouldn't it? I could always pay off a lump sum on the mortgage if I felt the need to "chip into the debt".

dannyboyslim Iunderstand yr mortgage is with NR, they have the facility when you overpay yr mortgage you can also borrow back (minimum £500.00)