Can't see the benefit of paying off mortgage early!

DemiDee

Hi all

I have a joint mortgage of 52K with a trusted friend. We go 50/50 with everything. Now our five year fixed rate is up and we can finally get a lower rate.

The problem is, I want to pay off £10K of the £26K I owe, whereas my friend will still owe £26K. HSBC have helped us to work out how much each of us will owe henceforth on the basis that my portion owed will be 16K. However, it seems that paying off a sum as large as £10k still means I won't break even until 11 years have passed, and it's only a 15 year term! Have I done the number crunching correctly, or am I just a little too hopeful about how much I would save by paying off a huge chunk early?

I'm left wondering if it's worth tying up my savings in the mortgage if I won't see any results until year 11. And yet I understand that I would need my 10K in a savings account earning at least 8% in order to save the £70pm that I would be saving on the mortgage

Many thanks to anyone who can get their head around this better than I can!

Thrugelmir

The benefit from paying off your mortgage comes at the end of the term.

Then rather than repaying the mortgage. The same funds can be used to build your pension pot for example.

Always take a long term view of finance. Read my sig. Compounding is the way to invest sucessfully.

loracan1

I'm not sure I'd be any help but knowing; what your rate is going to be and whether or not you're still going to pay the same as your friend or reduce your payments might make a difference.

slummymummyof3

You could always continue to keep your payments the same and not reduce them after paying off the £10k (assuming it is not over the 20% monthly amount that HSBC allow you to overpay without penalty) and that way you will benefit even sooner. Are HSBC still offering their 3.95% 5 year fixed rate? We took this out a couple of weeks ago with an arrangement fee of £599.

bigheadxx

The real benefit of mortgage overpayment is if you reduce the term rather than the monthly payment. If you keep the payment at £180 p/m then you will have paid off the mortgage after 9 years and save 6 years of repayments, approx £12,000.

Thrugelmir

bigheadxx wrote: »

The real benefit of mortgage overpayment is if you reduce the term rather than the monthly payment. If you keep the payment at £180 p/m then you will have paid off the mortgage after 9 years and save 6 years of repayments, approx £12,000.

Precisely then you have £12k to invest, which will grow into an even bigger sum.

wymondham

Thrugelmir wrote: »

The benefit from paying off your mortgage comes at the end of the term.

Then rather than repaying the mortgage. The same funds can be used to build your pension pot for example.

Always take a long term view of finance. Read my sig. Compounding is the way to invest sucessfully.

Excellent post and exactly what I've been able to do as I was not able to contribute anything like the amounts needed to get a decent pension whilst I still had the mortgage (and this is only going to get worse in the future I suspect!)

DemiDee

Thank you all so much for helping me to get my head around this! There was a reason I didn't do too well in mathematics at school.

To answer an earlier question, I was working it out on the basis that my payments per month would come right down, but now, thanks to all your help here, I see that I need to continue with payments as usual.

@ Slummymummy - yes, the HSBC deal is still available and is one of the 'best buys' on most tables. We are currently deciding whether to go for that, or to simply do nothing and slip onto the 1.5% variable rate (!!) which we will have once our 4.99% fixed rate ends in October.

redpete

DemiDee wrote: »

The problem is, I want to pay off £10K of the £26K I owe <snip>. However, it seems that paying off a sum as large as £10k still means I won't break even until 11 years have passed, and it's only a 15 year term! Have I done the number crunching correctly, or am I just a little too hopeful about how much I would save by paying off a huge chunk early?

I'm left wondering if it's worth tying up my savings in the mortgage if I won't see any results until year 11. And yet I understand that I would need my 10K in a savings account earning at least 8% in order to save the £70pm that I would be saving on the mortgage

It looks like you are thinking the sums out wrong. You don't 'break even' when you've saved at least £10k in interest payments. Now you've got £26k mortgage and £10k savings, so net £16k debt. If you pay £10k off the mortgage you will have £16k mortgage and £0 savings, so the same net £16k debt. Therefore you are no better or worse off when considering your net worth so how long it takes to 'save' £10k is irrelevent.

You need to consider how much you are earning in interest on the savings and how much you are paying in interest on the mortgage - if the latter is larger than the former you will be better off by paying the mortgage off. Then you need to decide whether you need to keep some of the £10k for expected of emergency spending (although some flexible mortgages allow you to take back overpayments if you need to).

DemiDee

I asked the mortgage advisor if it was better to pay off a mortgage early or make overpayments when the interests rates were low or when they are high, and he said that it's better when they are low, but of course, as you have quite rightly said, it depends on what interest rate you are getting on savings. At the moment, I have an ISA at 2.60% and the rest is in premium bonds, at quite a low rate of return for the amount invested (waiting for a windfall!).