Advise req'd. 90k mortgage 10k additional savings. Do we pay it off the mortgage?

bluenose1

Hi,
can't decide what to do for the best.
Have a 90k mortgage with Skipton (tied in for 5 more years.)
We can pay 10% of the balance off but there will be a 5% penalty.

Any advise on what we should do as we can't agree.
Regards
Anne

dunstonh

Compare the rate on the mortgage to savings rates and then add in the penalty. If you find savings rates are higher, then go with savings (or vice versa). Remember once the money has been paid to the mortgage account, you can't draw it out again. Don't leave yourself short.

Depending on your attitude to risk and the fact you have 5 years to wait, you could also consider investment options with some/all of it.

silvercar

Are you saying you will have to pay a £500 penalty to pay £10,000 off your mortgage?

Put the money in a high interest account, ISA preferably as that's tax free, if you found one paying 4.8% a year that would yield £480. If you put half in a cash ISA before this April and half after you would pay no tax.

If your mortgage is say 5%, if you had paid the £10k off your mortgage you would be saving £500 in interest payments on your mortgage each year. (I've assumed inteest only for simplicity).

So you gain £480 and lose £500 ie a loss of £20. In five years it adds upto £100.

So overall you save the £500 charge but lose £100 in extra interest payments.

I'd put the money in cash-ISAs.

stanmoresaver

I echo dunstonh's veiw with an emphasis on the fact that once you have paid it off, it is a lot harder to get it back out. And if you then have to go back for unsecured or secured lending the rate will be considerably higher

to my mind, the number crunching is as follows-If there is a 5% penalty, with 5 years remaining, roughly equates to 1% penalty p/a so the savings rate would need to beat the mortgage rate by 1% to be financially better off remembering the interest could be taxable.

bluenose1

silvercar wrote:

Are you saying you will have to pay a £500 penalty to pay £10,000 off your mortgage?

Hi,
Yes there is a £500 penalty to pay £10000 off the mortgage.

thanks for all your advise.
I should have said we are already up to the tax free limit in ISA's and will be investing in them again in April 2006.
This £10000 is in excess and will not need to be used over next 5 years as we have other savings to fall back on if necessary.

Do you still think I should save it. I keep changing my mind on what to do.!!!!
Regards
Anne

dunstonh

Personally I would stick it in equity ISAs/OEICs but thats me.

in-need_of_money

Hi
why don't you put it in a high interest account and use it to overpay on your mortgage each month to avoid penalty if you can?