Pay off chunk of Mortgage or clear ERL?

Rob71

Hi,

Just like the subject says, I have an equity release loan (with 2.5yrs to run) and a mortgage (~95k) which is set to run for another 20-odd years.

I have some limited savings and I'm currently wondering whether to use them to clear the ERL when they become available, or pay a chunk off the mortgage.

Both the ERL and the mortgage are on a SVR of 4%.

Now my brain is telling me that shaving 10K off my mortgage is going to save me more in the long run than 2.5 years @ 250 quid (the ERL) - but psychologically clearing the ERL would make me feel happier since it'll reduce monthly outgoings. My goal is to get the mortgage down to 60% LTV so I get a better deal when the time comes.

The MSE ethos appears to be "clear the most expensive debt" - in my case this is the mortgage isn't it?

Am I being dense?

getmore4less

If the interest rates are the same it makes no difference if there are no other charges.

Rob71

Thx for that getmore4less...

My thinking was that if I paid 10K off the mortgage now, according to the egg mortgage calculator, I'd save about 17K in interest charges and finish the mortgage 3.5 years earlier. Whereas, if I pay off the ERL the saving is significantly less (since the bulk of interest has pretty much been paid already).

I should get my statement in a couple of weeks - I'll plug the proper numbers into one of the numerous spreadsheets floating around on here, and work out what to do next.

One things for sure, there's no point saving when the interest rates are so low!

samizdat

You should clear the equity release loan ("ERL") because, as you say, this will improve your cash flow.

For example, the monthly payment on £10,000 at 4% over 2.5 years is about £351, whereas over 20 years it is about £61. Therefore, by paying off the ERL, you are freeing up about £290 of cash flow per month. This will neither increase nor decrease your net worth when compared with the alternative but it will improve your position vis-a-vis your financing obligations, i.e. it is better to minimise your payment obligations under loan agreements. If you were to use the spare £290, over a period of 2.5 years, to overpay your remaining mortgage, you would end up making the savings that the Egg mortgage calculator was telling you about.

Consider that lenders will look at your monthly outgoings when deciding how much they will lend you. The lower your obligation, the more you can borrow, which increases your flexibility.

Rob71

Thx samizdat! That's exactly the kind of answer (with justification) I needed to hear - lowering my monthly commitment whilst still having the flexibility to overpay (and reach the holy grail of 60% LTV) sounds like the perfect compromise!

Sometimes you can't see the wood for the trees!

getmore4less

Rob71 wrote: »

Thx for that getmore4less...

My thinking was that if I paid 10K off the mortgage now, according to the egg mortgage calculator, I'd save about 17K in interest charges and finish the mortgage 3.5 years earlier. Whereas, if I pay off the ERL the saving is significantly less (since the bulk of interest has pretty much been paid already).

I should get my statement in a couple of weeks - I'll plug the proper numbers into one of the numerous spreadsheets floating around on here, and work out what to do next.

One things for sure, there's no point saving when the interest rates are so low!

It looks like you save more but you don't.

The difference is due to the the fact that you have not accounted for the difference in regular payments between the two options.

dimbo61

If you clear the ERL first you will also find it easier when you look at remortgaging.
You will have a simple mortgage of X amount and this will make life a lot easier.
Check with your lender if you can overpay the £250 a month you would be saving ( because you have paid off the Equity Release Loan)
OR check if you could reduce the mortgage term so that you are now paying an extra £250 a month in mortgage payments.
Use "whatsthecost" to work out the figures

vn108

Rob71 wrote: »

(and reach the holy grail of 60% LTV) sounds like the perfect compromise!

Why is 60% the Holy Grail? (sorry if it's a stupid question)

dimbo61

In answer to your question vn108 just have a look on the Nationwide mortgage website for example and the best deals are for mortgages with a LTV of 60% or less!