Birmingham Midshires Over-payments: Too Good to be True?

Ankara_2

I'm trying to pay off my mortgage with Birmingham Midshires early. I have a variable rate buy-to-let mortgage at 1.95% above the BoE base rate. I've had the mortgage for exactly three years and have £81,096 outstanding and currently pay £398 a month.

I phoned BM and asked about over-payments. Their response was that if I wanted to pay a lump sum of £21,000, it would immediately come off the £81,096 outstanding and reduce my monthly payments to £296 a month. There would be no penalties or arrangement fees.

As a mortgage dunce, can anyone confirm if this is can possibly be true? I have a few cash ISAs tucked away, earning next to nothing at the moment. The idea is to cash them in and pay off £21,000 of my mortgage. I did phone BM twice and spoke to two different people who both confirmed the same, however, it just sounds far too good to be true. Thanks in advance

black_taxi_2

how many years?

Ankara_2

It's a 25 year mortgage, with 22 years to run.

black_taxi_2

current mortgage over 22 [EMAIL="years@2.45%"]years@2.45%[/EMAIL] is £398 a month

£21000 off

£60096 over over 22 [EMAIL="years@2.45%"]years@2.45%[/EMAIL] is £296 a month

get no penalties or arrangement fees in writing before you do it

also ask if you can keep paying £398 a month without penalty--reduces mortgage by a further 7 years

Ankara_2

black_taxi wrote: »

get no penalties or arrangement fees in writing before you do it

also ask if you can keep paying £398 a month without penalty--reduces mortgage by a further 7 years

Good advice, thanks.

black_taxi_2

ask on here---some good guidance

http://www.lovemoney.com/tags/mortgage.aspx?f=qanda

Deleriad

Ankara wrote: »

I'm trying to pay off my mortgage with Birmingham Midshires early. I have a variable rate buy-to-let mortgage at 1.95% above the BoE base rate. I've had the mortgage for exactly three years and have £81,096 outstanding and currently pay £398 a month.

I phoned BM and asked about over-payments. Their response was that if I wanted to pay a lump sum of £21,000, it would immediately come off the £81,096 outstanding and reduce my monthly payments to £296 a month. There would be no penalties or arrangement fees.

As a mortgage dunce, can anyone confirm if this is can possibly be true? I have a few cash ISAs tucked away, earning next to nothing at the moment. The idea is to cash them in and pay off £21,000 of my mortgage. I did phone BM twice and spoke to two different people who both confirmed the same, however, it just sounds far too good to be true. Thanks in advance

If a bank or building society is offering you something that sounds too good to be true then either they have made a mistake or you are missing something. In this case you are missing something.

You have cash ISAs worth 21K earning "next to nothing." You could probably put them somewhere where they are earning 3% plus. Earning you £630 per year in tax free interest.

Right now you are paying 2.45% interest on the 81K you owe. That means you are paying (roughly) £1,990 per year in interest.

If you knock 21K off your mortgage, you would be paying £1,470 per year in interest.

Compare: moving your cash to a proper ISA and not paying off your mortgage:
Interest earned £630, paid on mortgage 1990 difference 1360.

Paying off 21K from your mortgage, interest in ISA 0, mortgage, 1470, difference 1470.

By paying down your mortgage you are roughly 140 a year worse off.

So why does the mortgage offer look so appealing? It's because they are re-jigging your capital repayments to ensure that you pay off your capital more slowly. If you want to pay off your mortgage early: pay the 21K but keep your payments the same at £400 per month.

As a simple rule of thumb, if you can earn a higher rate of interest in a savings account than the rate of interest you pay on the mortgage, keep the money in savings and pay off a lump sum when mortgage rates exceed your savings rates.

Realise as well, that once you move that money out of ISAs you can't put it back in. You'll get upset if rates go back up and you've withdrawn it all.

*These figures are all approximate as you are on a repayment mortgage so the amount of interest you pay gradually declines.

black_taxi_2

easier site area

http://www.lovemoney.com/qanda/

black_taxi_2

good points deleriad

Ankara_2

Many thanks Deleriad. However, by my reckoning I think I'll be better off as I'll be paying £1,224 less per annum in mortgage repayments (i.e. I now pay £398 monthy, but if I pay off £21,000, I'll be paying £296 monthly).

Again, I may be missing something.

Edit: At the moment, the Cash ISAs I have are paying peanuts each month.

black_taxi_2

your building society is betting interest rates will go up

better return on 21k upfront(now theres) and higher interest mortgage payments to yourself

if you take offer ask for no restrictions/penalties o/p mortgage

only accept offer if you intend to overpay