Mortgage Free in Oct '09 ? - advice needed re ELC

edited 21 April 2009 at 3:32PM in Mortgage-Free Wannabe
9 replies 873 views
Little_ManktiesLittle_Mankties Forumite
22 Posts
edited 21 April 2009 at 3:32PM in Mortgage-Free Wannabe
Hi all,

My DH and I will (hopefully) be in a position come this October to be mortgage-free. :j We had a windfall in Oct ’08 but as savings rates were significantly higher than our mortgage at the time, we placed the money in two 1-year fixed rate bonds with the AA and Bradford & Bingley (£45k @ 7.21%/£15k @ 6.7%). DH is a higher rate taxpayer but as a stay-at-home mum I am a non taxpayer so these bonds are in my name.

Our repayment mortgage is with the Nationwide - a 5-year fixed rate at 4.79% expiring in Feb 2011 – which was initially taken out in Feb 2004 for £85k over 20 years. We’ve been overpaying on and off over the last few years (up to the permitted maximum of £500 pm) and this has reduced the term down to 13 years (with a current balance of just over £61k).

If we pay-off our mortgage in October when our fixed rate bonds come to an end, we will incur an early repayment charge which I believe works out to 2% of the outstanding mortgage balance at the time. (In addition we would also have been charged a £90 admin fee for paying off our mortgage unless it had less than 10 years remaining so I’ve arranged to reduce the term of our mortgage to less than 10 years so as to avoid this penalty).

I believe (but am prepared to stand corrected! ;)) that it makes sense to incur the 2% ERC unless savings rates are substantially higher come October, but wanted others opinions? (Obviously as a non-taxpayer I don’t want savings interest to put me in the category of having to tax income tax).

We do intend to move again from our current home (probably in the next 5-7 years) so does paying off the mortgage make sense given the above and if so, would it be sensible to keep a small mortgage with Nationwide so we have access to this avenue of borrowing when/if we move?

x

Replies

  • Thread title should have read ERC not ELC - oopps !
  • dimbo61dimbo61 Forumite
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    I hate giving any extra money to the building society if I can help it.
    Could you reduce your mortgage to 2 years and 5 months in october and use the money in your savings to pay the extra each month and also save into regular savers such as the Barclays 6% regular savers and HSBC 8% regular saver ( you need a current account for that one ! ) and put £250 each a month into both banks so you are earning the max return on your money.
    This would I think give you the max return while not clearing all your savings and paying a £1000/1200 fee.
    GOOD LUCK
  • littlemissbossylittlemissbossy Forumite
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    I had my mortgage with Nationwide and was overpaying by the max £500 pm. It was a fixed rate deal at 6.79% till Dec 09. I decided to bite the bullet last Nov and pay it off early incurring the early redemption fee which was a lot less than another 12 months interest. I left £1 outstanding so didn't need to pay the £90 admin fee or whatever they call it. This also means that I can 'draw back' the overpayment amount if I need to which is quite reassuring.

    Hope this helps.
    Don't wait for your ship to come in, swim out to it.
  • Thank you both for your replies.

    Dimbo - The regular savings option is certainly something worth considering as like you, the thought of giving any extra to the building society is not something I relish. However, although the interest rates on the regular savers are high, as I have a lump sum I'll be essentially drip feeding in it on a monthly basis and the remainder of the lump (which is not being discharged on the revised mortgage payments/going into the regular savings) will possibly be earning quite a low interest rate as I'll have to keep it in an easy access account (unless rates are a lot different come October).

    Little Miss Bossy - thanks for your advice too. Our situations seems pretty similar though you were obviously paying higher interest than we are. I'm interested to hear that you can leave a £1 balance with the Nationwide in place as we would like access to a mortgage facility again in the medium term.
  • i have a fixed rate and have just reduced the term of my loan. As long as the term is longer than your fixed rate you could try this. You will be paying more off each month and will have less to repay by Oct 09.

    I liked Little Miss Bossys' idea about leaving the £1 in the mortgage account, must remember this when I get to MFD.

    good luck
    Grocery Challenge Feb 16 £346 /400
  • i have a fixed rate and have just reduced the term of my loan. As long as the term is longer than your fixed rate you could try this. You will be paying more off each month and will have less to repay by Oct 09.

    This may well be our best option. Reduce our mortgage term right down in October (when our fixed rate bonds mature) so that the mortgage expires a month after our fixed rate comes to an end, thus avoiding repayment of the ERC - big monthly repayments which would come out of our capital, with the remaining capital being fed monthly into higher interest paying regular savings accounts as suggested by Dimbo.

    I guess in order to leave the £1 mortgage with Nationwide in place, I would then need to increase the term of the mortgage in order to keep this borrowing avenue in place in line with the original mortgage term?
  • littlemissbossylittlemissbossy Forumite
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    Little Miss Bossy - thanks for your advice too. Our situations seems pretty similar though you were obviously paying higher interest than we are. I'm interested to hear that you can leave a £1 balance with the Nationwide in place as we would like access to a mortgage facility again in the medium term.

    This interest rate 'situation' was what really forced my hand as I was paying at 6.79% and the interest on the money I had saved to pay off my mortgage had fallen to about 3.5%. It didn't make any sense to wait till my fixed rate ended IMO.
    Don't wait for your ship to come in, swim out to it.
  • dimbo61dimbo61 Forumite
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    The best way to save the ERC fee and pay as little interest as possible would be
    1 reduce the term to 2 years and 5 months so that it finishes just as the fixed rate ends
    2 overpay by the max £500 a month allowed until the balance is quite low and then change the DD/standing order to say £100 a month for the last few months
    3 save into regular savers
    The effect would be to clear the mortgage asap while paying the least amount of interest and earning interest from your savings. GOOD LUCK
  • Thanks all once again for your advice/suggestions and good luck to you with your own moneysaving endeavours :T
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