can someone help me with the maths on this please? Endowment payment

easy

Sorry, I have a cold and my head is a bit woolly, I keep getting different answers.

We have a mortgage, £82k currently on a fixed rate of 5.29% for another 2 and a bit years. During this fixed period, if we make a payment of capital, we will be charged a 3% penalty of the amount. However, we can make a penalty free over-payment of up to £499 per month.

The first of our endowment policies has now ended, and we have a sum of £16K to pay in.

I'm trying to work out whether reducing the capital amount by £16k (and hence reducing the interest payable) will be worth the 3% penalty, or whether we should bung the money in Premium Bonds, and just over-pay £499 per month for the next 27 months, and bung in the remaining £3k at the end of the fix?

I hope this makes sense.

dunstonh

I'm trying to work out whether reducing the capital amount by £16k (and hence reducing the interest payable) will be worth the 3% penalty, or whether we should bung the money in Premium Bonds, and just over-pay £499 per month for the next 27 months, and bung in the remaining £3k at the end of the fix?

Whilst you have a 3% penalty, you will save 5.29% per year. So, for one year and in simple terms you would be better off by 2.29%.

Premium bonds are rubbish and have an average win rate of 1.5%. So clearly Premium bonds are worse value over 12 months compared to paying off the mortgage.

Over 2 years, you will save 5.29% in year two (and the bit).

If it was me, I would probably over pay the £499 pm and look to see if I can get a decent rate for a 2 year fixed term deposit for the rest and then clear it at the end of the fix.

easy

dunstonh wrote: »

Whilst you have a 3% penalty, you will save 5.29% per year. So, for one year and in simple terms you would be better off by 2.29%.
Over 2 years, you will save 5.29% in year two (and the bit).

Of course. I should have worked that out myself.

dunstonh wrote: »

Premium bonds are rubbish and have an average win rate of 1.5%. So clearly Premium bonds are worse value over 12 months compared to paying off the mortgage.

Ah, the "Average" is a bit of a red-herring here. I know it seems like a sensible statistic, but in truth, it doesn't accurately reflect what happens, for those VERY FEW who do get the bigger prizes. I accept that we would probably win b*gger all in fact.

dunstonh wrote: »

If it was me, I would probably over pay the £499 pm and look to see if I can get a decent rate for a 2 year fixed term deposit for the rest and then clear it at the end of the fix.

Ah but we'll keep drawing on it each month for the overpayments, so getting a decent savings rate will be hard.

dunstonh

easy wrote: »

Ah but we'll keep drawing on it each month for the overpayments, so getting a decent savings rate will be hard.

Hold 2 and a bit years worth of £499 and see if you can get a good rate on the leftover.

If you cant get at least 3.5% net, then take the hit on the mortgage

easy

dunstonh wrote: »

Hold 2 and a bit years worth of £499 and see if you can get a good rate on the leftover.

If you cant get at least 3.5% net, then take the hit on the mortgage

The left-over is only about £3K.

getmore4less

Emergency funds at the right level?

Fill up ISAs now(standard life 2.65%)

Over pay by the £499p

Should be able to at least break even, slightly better rates for 1/2y fixed.

40% tax payer consider a pension top up.

Remember the first £499 you pay a 3% penalty only saves you 1 month at 5.29% the second is 2 months etc.

jamesd

Ask what the required monthly payments will be if you change the term to three years and whether there's a cost to do that. Also check that you can change back once you've paid all of the money in at the higher rate.

redpete

I reckon you would be £5-600 better off by putting the money into an easy-access savings account (best buy approx 2.5% interest just now) and drip-feeding £499 a month into the mortgage, as suggested you couyld also put the £3k 'surplus' into a 2-yr fix earning about 4.5%. For the full fiinesse you could put an additional £3k into a 1-yr fix at 4% and transfer it to the dripping account after 12 months.

(all the above is compared with paying the whole £16 in now and paying the 3% penalty fee.)