Paying off the Mortgage.... what about penalty?

wellandpower

Hi!

I was wondering about my mortgage, I am one month into a 5 year fix. The penalty for early replayment is 1% per year (reducing on a daily basis). I have a small excess every month over and above the already small amount I can pay without penalty.

I just wondered, at what point do you think I should pay off my mortgage rather than save it?

Which makes the most sense until what point?

kustard

Sounds like you could do with Martin's 'Ditch the fix?' calculator. It's located here:

http://www.moneysavingexpert.com/mortgages/fixed-discount-mortgage-guide#calc

wellandpower

Thanks for the link, however it is not a case of ditching the fix. Its a good fix and only just taken it, very happy with it.

Its a question of weather or not to overpay the mortgage with spare money when there is a penalty. At what point shoudl you do it and when shouldn't you?

Jonbvn

Most fixed rates mtgs allow some overpayment. The usual amount is 10% of the capital owed per annum. Check your T&C's for details.

Rich1976

Before you overpay anything you need to make sure you have the following in place.

1) Put Enough savings in a saving account to cover any likely or unexpected expendiure in the near future eg for holiday, car, house maintenance etc

2) You have adequate insurance in place to make sure you're protected if you're made unemployed ( unless your self employed), or suffer a critical illness or if you can't work due to illness

3) You need to make sure you're paying enough into long term investments such as a pension and/or an investment ISA.

Only then once you have any spare money should you consider overpaying.

dimbo61

If you can overpay by what you are allowed each year and then save into ISA,s and regular savers hopefully paying at least the same rate as your mortgage rate.
Dont forget your pensions
Overpaying by 10% each year( if allowed!) is a good start and build up your long term savings

chirpchirp

It's not worth overpaying if you can get a better rate of interest than you are paying on your mortgage. When calculating this you need to look at the interest rate minus tax to see if it is worth your while.

If you look at Martin's guide to paying your mortgage off, sorry I don't have the link nor do I know how to post links, you will find a calculator which will calculate whether you will be better off paying the interest or saving the money.

I don't think you stated how much your fix is but there are some reasonable savings accounts around. Martin always advises filling your cash ISA first as you will not have to pay tax on the interest during the whole time you hold the ISA. I personally have a regular savings account which pays 5% with Lloyds and another with Halfax also paying 5%. There may be better savings accounts around now, so worth looking into. My current account also pays a good interest rate dependent on how much I keep in it which allows me to keep a large safety net. It's a Lloyds account with vantage. Vantage users can earn upto 4% if their balance goes over £5000 - another account worth looking at. Hope this answers your question.

chirpchirp

Trying to post the link for you http://www.moneysavingexpert.com/mortgages/mortgages-vs-savings

I think that should have worked.

I hope the above answered your question but I have a feeling that it didn't that your question may be linked more to the ERC.

I guess to answer that you need to calculate how much the ERC is and how much the overpayments will save you. Unfortunately, I don't know an easy formula to do that. Hopefully one of the maths wiz will be by shortly.

nearlyrich

When we had a penalty for overpaying we paid the spare cash into a savings account and just paid it off once a year as per the terms of the mortgage, it's not usually worth incurring a penalty especially when the rates are so low as it's likely to be more than you save in interest.

UncleBuck

chirpchirp wrote: »

It's not worth overpaying if you can get a better rate of interest than you are paying on your mortgage. When calculating this you need to look at the interest rate - tax to see if it is worth your while.

ChirpChirp is correct, you should look at the net interest which you will earn v the gross rate of the mortgage. If you currently only have a small ovepayment amount then you could put this into an instant access savings account and when the amount gets larger, look to put it away for a fixed term :rolleyes:.

I've 'technically' paid my mortgage off but all the savings that would have been in the offset savings account are out in higher interest earning savings account

Good luck

UB