Should we pay lump off mortgage or save it?

lilbabyadam

We have £20000 in the building society, which we were planning to use to help us move house (we were going to put the house up sometime this summer once had finished a few bits of decorating). This is no longer happening as I have given up work and decided to be a stay-at-home-mum for a couple of years, and we wouldn't be able to get enough mortgage to move on just my partner's income. We can afford the mortgage payments currently on one income without any over-stretching as they were calculated on affordability aswell as income, and we have paid all our debts off since then so have a lot less monthly outgoings.
Anyway, partner is considering either moving the £20000 to a higher interest-rate account and leaving it there until we do move house (probably in 2-3 years but depends on me getting a job, we NEED to move in 4 years as son will be too old to share room with daughter) OR paying a lump sum off the mortgage with it. Any advice on the best option? We originally borrowed £81000, house was bought for £89995, would probably sell for £95000 minimum now as we have modernised and houses around us have sold for between this and 110000 recently. Where we are looking to buy we would probably have to pay £105-120000.
Balance on mortgage as of Jan 2010 statement was £78,491.35, interest rate is 5.99%, and we pay £529.22 per month. Only thing I can't find right now (baby is asleep in our room and don't want to dig too much) is our terms and conditions regarding fees for paying a lump sum, which I know will be a factor, but would like advice regardless of this and I will try and find later and update.
Thanks x.

jockosjungle

You'd struggle to get 6% interest on your lump sum so my advice would be to use it to pay off some of the mortgage, leave some behind as a rainy day fund and bear in mind you might only be able to pay off 10% of the balance so may only be able to get rid of £8k anyway

R

dimbo61

Good advice from Jock as you wont get anywhere near 6% from a savings account after TAX so maybe a good Idea to pay 10% off IF ALLOWED.Check with lender or read the terms & conditions in the paperwork.
Do not pay any ERC,s to the lender and keep a good Emergency savings pot of upto £16K in cash ISA,s so tax free savings

VT82

All good advice. Find out how much you can repay without being hit with an early repayment charge. It will usually be one of: 10% of the mortgage (I think original loan soze) per year, £1k per month, or unlimited if you are not tied in (unlikely as 5.99% sounds like a fixed rate).

If it is 10%, pay your £8k now, and again next time you can (next January, April or June depending on the lender).

If it is £1k per month, start that now and stop when you have put in as much as you want to.

Once you have paid it in, you probably won't be able to get it back, so check it will at least give you the opportunity to have a payment holiday for being in credit, and make sure to save some savings for a rainy day.

And look forward to the day you will be moving into a nicer, bigger house and only needing a 50% mortgage :T

lilbabyadam

Thanks for the advice, I am going to hunt out the terms and conditions tonight and will sort it out then, if we can make a payment without ERCs then we will, even if it is only a small percentage. Definitely will be looking into opening up some kind of ISA for us both and chucking in any extra money we get also towards this, would much prefer not to have to extend our mortgage when we move as my parents fell into this trap and if we do it right we got our mortgage young enough to pay it off much earlier than retirement age :j

Gorgeous_George

If you like a flutter you could invest it in a NSandI RPI tracker. These pay 1% above RPI tax free and with VAT increases it is possible that inflation will rise even further. Although called 3 year and 5 year products you can get your money early but it is best to leave it for at least a year.

Have you considered an option to extend your current home? £20K would go a long way to pay for an extension/loft conversion.

Other than that I agree that you will struggle to find 6% after tax. However, what if you ned to move in 4 years' time and find yourself in negative equity and unable to move. You may not be able to get the £20k back form your lender and the home extension option will be lost.

There is some value to holding on to the cash.

Your call.

GG

lilbabyadam

Thanks, we have looked into extending and would probably get planning permission as previous owner did but then changed mind (got sick and moved to bungalow), but we would lose a lot of the garden which is one of the things we love about the house, and also we could do with moving closer to the school DS goes to, it's actually nearer my mums home than mine as a throwback from when I was single and working full-time, and the school near me is incredibly rubbish, therefore all the other schools near me are over-full grrrr (sorry, bit of a rant there lol!) Anyways, so yes, if we had to we would extend, i.e. if we kept the cash and in 4 years we were in negative equity or houses were impossible to sell/buy type thing. I do very much doubt we will go into negative equity though, considering we owe 10000 grand less than what we bought the house for, we bought it for a very low price for the area due to them wanting a quick sale and it needing modernising, and it's at the end of the market chain where prices don't tend to drop that much anyway, type thing. I know you can never say never, but the market would have to go really bad for that to happen, a lot worse than last time, and I know I probably sound really naive but I genuinely can't see the house dropping that low, as in below 75000