Mortgage - what do i do with a lump sum

Tony_1969

Hi,

I am about to leave the forces and will get a £40k lump sum payment.

At present I am in a fixed rate mortgage with Northern Rock and owe approximately £157k. This is fixed until Apr 2011 and has an early exit fee of about £4.5k.

My question is, given the current climate, what shall I do with the lump sum? The way I see it my options are:

1. Sit on the lump sum until Apr 2011 and then remortgage using all the £40k and get a new mortgage for about £115k.

2. Sit on the lump sum until Apr 2011 and then get an offset mortgage (VirginOne etc).

3. Pay Northern Rock the early exit fee and get another mortgage now.

All this is more complicated as I am just about to start my new job as well!!

Any advice will be greatly appreciated.

Tony

luckyfool

Put the lump sum directly into your current northern rock mortgage . . . and then remortgage when your deal expires.

If your rate is fixed then typically Northern Rock allow "unlimited" overpayments on these without penalty, and the penalty only kicks in if you pay off the last pound.

Assuming your rate is 4.5%+ then you are probably better knocking your mortgage down rather than putting the money into savings.

Tony_1969

Not wanting to sound stupid (I have no real knowledge of this area) If I put all £40k as an overpayment what would the overall effect or savings be. I know there will be some. Without checking I think I am fixed at 5%.

Sorry the other thing I did not mention is I originally borrowed £110k interest only and the remainder on repayment.

Cheers

Tony

Rockporkchop

Putting your lump sum into your current Northern Rock mortgage makes great sense. If you put the £40k into your mortgage account now, your monthly payments should reduce by about £280 per month (based on you having 20 years left on your mortgage).

If you can afford it, think about keeping your mortgage repayments as they are (so overpaying by £280 per month) and you will be able to make a serious dent in your mortgage.

luckyfool

You get the benefit of getting an effective tax free savings rate of 5%. i.e. on £40k you pay £2,000 less in interest on your mortgage per annum than you would otherwise.

Tony_1969

Cheers for all the advice - it all makes sense.

Tony

Something

Not sure if you have/want savings, but maybe a few k into an ISA for emergencies is sensible too.

olias

May not be very MSE, but do consider taking £1K out and have a bloody good holiday. Don't know your circumstances, but after a long stint in the forces you probably deserve it!

Olias