Mortgage up for re-newal. Use or save 10k savings?

tyllwyd

Have you asked them what happens when your fixed rate runs out? Will they revalue your house? Will they allow you to continue interest only? If they do, will they ask you to show that you are saving towards repaying the capital, in an ISA etc? What happens if you have less than 90% ltv, or if you turn out to be in negative equity?

Their website says
"
Interest-only or investment backed mortgages

With this option you only pay mortgage interest to us each month. The loan is repaid at the end of the mortgage term from the proceeds of an investment, such as an endowment, pension, PEP or ISA. Premiums for the investment are paid to an investment or insurance company.
...
With an interest-only mortgage you are responsible for ensuring that there are adequate arrangements in place to repay your mortgage. If you don't, serious financial consequences could result in the loss of your home. If you are thinking of changing your repayment method, or want to borrow additional money on an interest only mortgage, we suggest that you contact one of our Norwich Union Financial Consultants.
...
We may require details of any endowment, ISA, pension policy or PEP being used to pay off the mortgage.
..."
http://www.coventrybuildingsociety.co.uk/mortgages/repayments.aspx

I don't know if they follow that up, but really if you aren't on a repayment mortgage you should be looking at it yourself. I think it is a bit unrealistic to think of your 10K as 'savings' - if you were on a repayment mortgage for 3 years, its only what you would have paid off the capital in that time, so to have 10K savings you'd need twice that amount, if you see what I mean.

AJS33

Hi

I was in a similar position to you with £10k in savings - i asked my financial advisor and he said it was better to pay off the mortgage a little as the interest in a bank account was rubbish - so in december i paid £10K off and now hoping to overpay the mortgage as much as possible this year. i am also keeping a emergency fund of £2500

bubblesmoney

with interest rates at a historic low there has never been a better time to repay the capital part of the mortgage. so repay the capital.

u also mention that 99% of the 10k 'savings' is a gift. so effectively in the 3 years u havent saved at all (except the 1%) inspite of paying an interest only mortgage at historically low rates (even accepting the fixed rate). plus u have the debts on CCs. also most probably u might be in negative equity now come valuation time for the next mortgage application and u might struggle to find one. even with the 'savings' u might struggle to meet the LTV criteria.

time to budget properly, cut down wasteful expenditure (sky, nights out, buying sandwiches & drinks for lunch instead make ur sandwich and drink tap water which is healthier and cheaper, holidays, booze, smoking, costly clothes and shoes or anything that is applicable in these or similar categories) and really try to save and get ur life in order. otherwise you are a ticking timebomb. save while u can or u will regret not saving later and might lose your home too. use every bit of the savings (minus emergency fund) for paying off your debts ASAP. best of luck.

laura2481

bubblesmoney wrote: »

with interest rates at a historic low there has never been a better time to repay the capital part of the mortgage. so repay the capital.

u also mention that 99% of the 10k 'savings' is a gift. so effectively in the 3 years u havent saved at all (except the 1%) inspite of paying an interest only mortgage at historically low rates (even accepting the fixed rate). plus u have the debts on CCs. also most probably u might be in negative equity now come valuation time for the next mortgage application and u might struggle to find one. even with the 'savings' u might struggle to meet the LTV criteria.

time to budget properly, cut down wasteful expenditure (sky, nights out, buying sandwiches & drinks for lunch instead make ur sandwich and drink tap water which is healthier and cheaper, holidays, booze, smoking, costly clothes and shoes or anything that is applicable in these or similar categories) and really try to save and get ur life in order. otherwise you are a ticking timebomb. save while u can or u will regret not saving later and might lose your home too. use every bit of the savings (minus emergency fund) for paying off your debts ASAP. best of luck.

As previously mentioned the money is not mine to spend on clearing off my credit cards. It would be a massive weight off my mind if I could. And I was generalising- £6k was inheritance, £4k was savings.

I couldn't have saved more as I was really struggling with debts and over spending every month. I have now made some changes and managed to get a lot more organised. I already take lunches to work, don't have holidays and have reduced all bills as much as possible. I don't smoke and rarely buy new clothes. I don't think there is very much else I could give up.

So the question was- switch to repayment or stick with interest only, and use £10K or not?

In order to get a decent fixed rate we are probably going to have to use the £10k to have a reasonable LTV. It wasn't a very high value property so the rise and fall should have pretty much cancelled each other out. With the current low interest rates it would seem silly not to get a good low rate repayment mortgage while we can...

We will just have to get an emergency fund together ASAP.

b0rker

Phirefly wrote: »

Surely all of the above depends on the SVR? It could well be that her lenders SVR is considerably lower than her current fixed rate (as mine is). I had been contemplating overpaying by a similar amount myself because I'm now self-employed so that in mind may find it hard to find a fixed deal with my current LTV. But with a bit of luck when my fixed deal ends the SVR will be as low as it is now, and I'll just switch to that and keep a cose eye on it. If if starts to increase dramtically, maybe then I'll make the overpayment. For me, the security of that buffer in the event of a loss of income is the priority currently. Don't panic OP.

Yes but as I said at the moment your home could be losing value at a rate of 1-2% per month. Therefore the longer you stay on that SVR the more chance you may have of not being able to meet the magic 90%.

I would prefer that no one panics. I am attempting to deny myself that particularly painful emotion myself currently. That being said it is best to keep aware of all possible issues at such a volatile time.

b0rker

chairmanofthebored wrote: »

With the kind of rates you are getting on savings these days it's probably the best way you could get the money working at the moment, anything you save on your mortgage as a result could be put back into the savings to help them grow and thus reduce your mortgage payments further.

I am sadly ignorant as to how an offset mortgage works. I have been wondering how they work recently. I will have to google it.

chairmanofthebored

Well the theory is that you hold your savings account with the same bank as your mortgage.

Then instead of earning interest on your savings, you instead offset it against your mortgage amount.

So...

If you have a £70,000 mortgage and £10,000 savings, you would pay interest on just the first £60,000 of your mortgage and reduce your payments or reduce the term of your mortgage.

The up side of this is that your savings remain intact and generally speaking mortgage rates are usually higher than those earned on savings so you'll be getting most value from them.

The down side is that due to inflation your savings will devalue over time unless you continue to pay into them. Also offset mortgage products often charge a higher rate of interest. My advice would be to shop around or speak to an independant broker if you're interested.

I'm not sure about the tax situation mind you, perhaps someone could clear that up for me? Do you still pay tax on interest earned on your savings if your mortgage is offset against them?

LilacPixie

I think if you have an offset mortgage you earn no interest on the savings so therefore there is no tax due.

Thrugelmir

b0rker wrote: »

I am sadly ignorant as to how an offset mortgage works. I have been wondering how they work recently. I will have to google it.

In our offset mortgage the interest on our "savings" account is credited monthly to our mortgage account. The mortgage repayment is based on the original terms of the mortgage. So although we are in effect repaying more off the mortgage the effect is to reduce the total debt and therefore the term of the mortgage.

Interest on the mortgage is calculated daily, so the monthly interest on the savings account reduces the further the interest on the mortgage. Its always worth remembering the effects of interest compounding. The saving may seem low at the beginning but over the years could repay the debt several years early.

No tax is payable, so in effect our after tax interest rate is the same rate as our mortgage.

As we have both cash savings and mortgage debt we have no worries if our lender goes "bust", as the two balances will be offset.

Fire_Fox

laura2481 wrote: »

In three years we have saved £10k between us ...

99% of the money is my boyfriends. It was an inheritance from his grandparents ..

As previously mentioned the money is not mine to spend on clearing off my credit cards. It would be a massive weight off my mind if I could. And I was generalising- £6k was inheritance, £4k was savings.

I even managed to go backwards since my LBM last march.

I don't think you are being 'attacked' hun, it's just that you have asked for advice on a given scenario, then moved the goal posts twice. The advice appropriate for a couple who have saved £10k between them in three years could bevery different to that given to a couple on a interest-only mortgage, one of whom has inherited some money and the other who admits on another board to having increased her debt in the last year.