can some one give me the maths? please

millsmum

I'm all for paying off our mortgage early, but oh needs some encouragement, so please could some one help me show him some figures.

our mortgage is £91250.00 at 5.5%
I have managed to offset £1004 to date

my oh has £38000 squirreled away in an internet account which pays 5.3% gross.

my oh is a higher rate tax payer, just.

I want to offset the mortgage with the 38k but he is worried about not earning any interest on it.

can some one help me show him the error of his ways??

A_Nice_Englishman

Basically speaking,

If he's earning 5.3% gross that's 5.3 x 0.6 = 3.18% net (assuming it is all taxable at 40%) so he will get £1208.4 interest a year.

If you offset it against the mortgage you will pay £38000 x 5.5% = £2090 less interest a year.

millsmum

so, if i put the say 38k off set against the mortgage and kept the payments the same,
he would lose £1208.40 per year in interest,
but we would save 2090 a year in interest charged,
therefore we would pay our mortgage off nearly 6 years early and save £45061
where as if he kept it in an account over 14 years he would have only earnt £16912
does this sound right

A_Nice_Englishman

My knowledge of compund interest is too rusty to check your figures but the principle holds true. A higher rate taxpayer in particular will be better off by reducing debts rather than increasing savings.

millsmum

I have managed to squeeze 25k out of him. Its a start and it should be on the account on saturday. I'm so excited i feel like squeezing some more!!

Mrs_pbradley936

I think it is a psychological barrier you have here rather than a numbers game. He probably feels that with savings he has a “safety net”.