Paying off mortgage with lump sum.

mumblesminx

Hi,

Due to a very good (albeit temporary) work contract I have been able to save enough money to pay off my mortgage.
What I am wondering is, is this the best thing to do with the money?
I realise there is an element of personal choice involved but would really appreciate your thoughts and alternative ideas.

Mortgage remaining - 38000 (including a 1680.00 redemption penalty and final fee)
Amount in savings - 40000
House value (approx) - 160000
No other debts, credit cards, loans etc.

I will be looking to move house in around 5 years (when work in my area completes) if this has any bearing on the decision. I am hoping to buy my next house with cash savings and the sale of my present home. I may wish to get another mortgage in the future depending on house prices.

I am 35yo, married with two young children.


Cheers,

mumblesminx.

JA1000

Yep

Just make sure you have some emergency funds, 6 months salary as a guide.

redpete

What interest rate are you paying on the mortgage?

What interest rate are you getting (or could you get) on your savings?

Does the mortgage offer flexible overpayment facilities, if so what are they?

What is the term remaining on the mortgage?

Do you have sufficient savings to cover you if you were made redundant, or couldn't work because you get sick, or...?

mumblesminx

I am paying 5.49% interest on a fixed rate mortgage.
The fixed rate ends in Jan 2014.
If I were to continue paying i would have 10 years left to pay.
I am allowed to overpay and ahve been doing so (limited to 10% of what I initially borrowed).
My interest rate for savings is a dissapointing 2% at the moment. Paying off the mortgage would mean using all but my emergency fund of savings.
I am very unlikely to be made redundant however such a package from my employer would mean I would be comfortable for even a prolonged new job search.

Thank you for your interest.

mumblesminx.

JA1000

You will save in interest the ERC so it's a no brainer.

redpete

Even if you managed to get double that savings rate (4% after tax) the payback to take into account the early payment fees is less than the 4 years left on the fixed rate deal - so I would pay it off unless you might want cash savings for something in the next few years.

Another alternative might be to put some or all of the savings into a pension - effectively borrowing at the mortgage rate for a future pension. Using tax relief on pension investmentds (and matching company contributions if it applies to your employment) can make this an attractive option.

ClimbingKid

I may have an approach to save your £1600 ERC and also give you more flexibility.

I have done something similar. I had a 70k mortgage with 18 years to run and am on a fixed rate, already paying the maximum £500 monthly overpayment. I read the small print of my mortgage and checked with my provider (Nationwide) who confirmed that you can change your term without any penalty. So I reduced it, to a ridiculously small term.

In my case a simple form to set the new repayment date - and I repayed the bulk of the mortgage over a few months.

I paid all but a very small affordable amount - I suppose you could then pay even that amount off, the ERC on this small amount would be tiny.

Seems to be a bit of a loophole, hope it helps.

CC

mumblesminx

Thank you all for your thoughts and ideas. Very interesting thoughts about pensions and reducing the term to avoid ERC. I will be investigating these further.

mumblesminx.