We have enough money, but with a very low tracker rate, should we pay it off?

jackieinedlesborough

In about 4 weeks time, when a bond we have invested with Raphael's Bank matures (Thanks to an MSE tip-off!), we will have enough money to pay off our £53,000 mortgage in full. :T

However, our Santander repayment mortgage has a very low tracker rate - just 0.49% above base rate, which means that it is currently only 0.99%. It's also an offset mortgage. Before the rates dropped in recent years, all of our mortgage payment savings (and others) were in the tracker account, minimising the monthly interest payable to just pennies each month. When the bank rates plummeted we moved all money out of the offset tracker and into other savings.

So, the question now is "We have the money.....should we pay our mortgage off in full?". I've thought about 3 alternatives:

1. Pay it off.....forget about it .....enjoy (or save for retirement) the extra money available each month.

2. Don't pay it off, but re-invest the assigned savings elsewhere in an account that pays a higher interest rate net of tax than our tracker mortgage charges (ideally in a savings account that also tracks above base rate, so we can't be caught out if the rates do change. The current Santander Loyalty Tracker bond would be ideal, but subscription to it ends before our Raphael's bond matures ).

3. Keep back the amount that it would cost us to pay our mortgage for the next 12 months from the bond maturity amount, but re-invest the rest in a good 12 month tracker or fixed rate account. Use the withheld money to pay the mortgage each month, so that it "feels" like we've paid our mortgage off, even though we haven't! We can then save or spend the monthly-income money we usually use to pay the mortgage each month as we feel fit.

We have savings elsewhere both in Cash ISAs (maxed-out) and in various savings accounts, so the money we have available to pay off the mortgage is specifically assigned for this.

The only other cost of having the mortgage is a monthly life-insurance policy, which is just under £10 pcm.

I would imagine that you good folks out there have lots of good ideas of what we should do. I'd love to hear them........

Thanks in anticipation,
Jackie

donglemouse

you could stick your money in an instant access account at around 2.8% (the likes of the aa, santander etc. being careful not to put more than £50k with one bank)

you would then be earning c2.8% interest on your money but only paying 0.99% on the mortgage i.e. you would make 1.8% per year on your £53k

you have the flexibility that at the drop of a hat you could if needed for whatever reason pay off the mortgage if you required e.g. if circumstances change like interest rates go up

if nothing changes in the meantime you will be making 1.8% x £53k = £954 per year more than if you pay off the mortgage now

just my personal thoughts and to keep it simple i ignored tax, if you are paying tax on the savings account your profit will be less than above but a profit regardless

i suppose the only caveat i would add is you need the discipline not to be tempted to blow the £53k because it's in an instant access account, but that shouldn't be a problem for most sensible people

quantic

Personally I would pay it off. For me the peace of mind would outweigh £954 a year or whatever you could gain financially.

de1amo

interesting the fact you dont appear to have a pension??---the house you own wont support you in your old age to live in it--you need to rectify this deficiency if it exists?!

must_try_harder_2

Is the mortgage portable? Are you likely to move?

We had enough savings to pay our mortgage outright but didn't as we we're only paying 0.69% above base rate. We've now moved to another house and have been able to port the existing product across and just take out a new mortgage for the extra. This is obviously now saving us a fair amount of cash each month and I am very glad we didn't pay the original mortgage off.

jackieinedlesborough

de1amo wrote: »

interesting the fact you dont appear to have a pension??

I think we're both OK for pensions. Both still in Final Salary Schemes - me with 31 years and OH with 21 years (so far). OH also has a personal pension as a top-up.

We don't have any other debts either, although we do have a daughter who is due to start Uni in Sept/Oct 2011 so will have additional expenses to cover for her from then on.

My heart goes with a previous respondent.....Just pay it off! But my head is nagging for an advantageous financial outcome!

I'm interested in hearing arguments either way.

Thanks

jackieinedlesborough

Hi must_try_harder,


Yes the mortgage is portable, but we won't be moving. We live in a lovely village and, barring a 130 million plus euro-million win (....nope.....it wasn't us!) we fully intend to stay put until we are carried out in boxes

Your experience is good feedback for me. Thanks

de1amo

i am in the same boat as you--i am keeping the money loose at the moment for any possible rainy day'-i am in a situ that once i pay my mortgage off it would be hard in the present climate to get another mortgage of the same value--i keep my money in lloyds vantage accounts--they offer 4pc int less tax---well done in getting to your situ in life.

jackieinedlesborough

de1amo wrote: »

i keep my money in lloyds vantage accounts--they offer 4pc int less tax

Ooohhh....Thanks for that tip. We both bank with Lloyds TSB and have Classic (fee free) accounts, and it looks like we should be able to add the Vantage facility too if we decide to go down this route:).

de1amo

you can have 3 accounts as a single account holder and then some multiples as a married couple--as long as you keep flipping the 1000 a month into the different accounts it keeps paying interest--its pretty easy if you have online banking

Ferdinand_2

I know we are always told to pay mortgage debt off but I always struggle to see how this is always correct as you have to pay a bit more interest on Mortgage normally than interest you get on savings fair enough although in many cases at moment this isnt even true. But you also have a large cash sum that you would lose if you pay it off, and it would presumably take a fair time by being disciplined enough to pay into a new savings plan what you used to pay the mortgage off