Pay off a £76k mortgage or save/invest for 4 years?

stevwarn

Hi

I am in need of some advice/direction. I have a £76k 3.99% fixed rate repayment mortgage with HSBC. The current ERP is £3222.00, which reduces by £2 per day until March 2014. I am a higher rate tax payer, but my wife is a non-tax payer (we are both under 65). The mortgage term is 17 yrs and the monthly payment is £505. I can overpay by 20% of the monthly amount which is approx £100 p/m (interest is calculated daily). The mortgage is portable and we may move this year to a larger house (hopefully mortgage free).

I am due to come into enough money to pay off the mortgage (including the ERP), but I am having some difficulty calculating whether it is better to save the money until after the fixed rate period (in my wifes name to avoid the tax) or pay off the mortgage early :money:. We already have enough money for an emergency fund (i.e. 3 months) and I am in a secure job.

Is there an online calculator that will help me with my decision (the MSE calculator doesn't include ERP or non-tax payers)?

Any advice will be gratefully received.

Thanks

weezl74

Hi,

How much reduction in your term will your lender allow without penalty? If you could shorten the term significantly and still make the 20% op then this would make it even more worth doing.

HTH

speric07

Have you tried going into the bank and saying that you want to pay off the mortgage early without penalty??

Advise them that they are not the highest payer of interest on the market so if they don't agree then they will not get the money as an investment.

You should haggle with them, at the end of the day it's the bank managers decision if you pop into branch. If they want your money they will potentially be nice with the exit fee.

If that didn't work use the following, put your details in and then an over payment of the mortgage balance. From the figures above it looks like you would save yourself almost 5K in interest.
w w w.
whatmortgage.co.uk/calculators/fleximortgage.html

If you do go down the investment route ensure that you split the money between 2 accounts. i.e. 50k and 24k, so you are protected.

Have you considered talking to a financial advisor??

stevwarn

I have spoken to HSBC and in principle I should be able to reduce the term to 5 yrs (fixed rate period) and pay the 20% per/month overpayment. However, there is a big question mark over this because if I pay off the mortgage before the fixed rate period (i.e. which I will if I reduce the term and overpay) I will incur an ERP. Does anyone have any experience of doing this with HSBC? However, even if I reduce the term the interest I pay will remain the same?

weezl74

sorry no experience with hsbc but my dad overpaid all bar £1 of his mortgage and left the £1 sat there and paid interest only on it until his fixed rate deal ended. this was 15-20 years ago so they may have closed that loophole!

speric07

I thought that when you overpay your monthly repayments are recalculated? With my tracker that happens (with HSBC).

BTW, paying off your mortage now on a renegotiated 5 year term will save you £7.5k according to the link. (I put in the wrong figures, initially.) This means thats a 4.3k saving when taking your exit fee into account.

stevwarn

Thanks for all the valuable advice. I am still unsure whether financially I would be better to pay off the mortgage now or put the money in a savings account until march 2014 when the ERP ends? If I choose the saving route what rate does my non-tax paying wife need? If it is 3.99% and above this is difficult to achieve at this time unless you fix a rate. There is also a possibility that my wife may return to work in the next year or so.

stevwarn

weezl74 wrote: »

sorry no experience with hsbc but my dad overpaid all bar £1 of his mortgage and left the £1 sat there and paid interest only on it until his fixed rate deal ended. this was 15-20 years ago so they may have closed that loophole!

:T This option would be great but I fear that I will incur the ERP, but is worth asking. I am still unsure about reducing the term as surely I will pay the same amount of interest over the 5 years?

stevwarn

I guess I need two calculators to answer my question. One to calculate the compound interest on a savings account over the mortgage fixed rate term verses one to calculate the mortgage interest incurred and go option which saves me more money.

Jonbvn

stevwarn wrote: »

If I choose the saving route what rate does my non-tax paying wife need? If it is 3.99% and above this is difficult to achieve at this time unless you fix a rate. There is also a possibility that my wife may return to work in the next year or so.

Since your wife is a non-tax payer, you can compare the AER from a savings account directly with the APR from your mortgage. To beat your 3.99% mortgage APR, you would have to fix your savings for more than 3 years.

Since your wife may return to work, overpaying the mortgage may be better in this instance.

stevwarn wrote: »

I guess I need two calculators to answer my question. One to calculate the compound interest on a savings account over the mortgage fixed rate term verses one to calculate the mortgage interest incurred and go option which saves me more money.

Forget about compounding. Just compare the annual rates.

dimbo61

You also mention that you may move this year to a bigger house ?
Keep your existing deal ( if its portable!) and use the extra money you have to put down a bigger deposit.
3.99% is a good fix.
While you are looking for a new property ask HSBC to reduce your term to the 4/5 years left on your fix.
this will mean your mortgage payment will go up BIG STYLE but more of the payment will be off the capital each month.
overpay by 20% on top and put any spare money into CASH ISA,s in both names and regular savers in your wife,s name
HSBC will recalutate your mortgage payment taking into account the overpayments at the end of the year.
EASY