Lump Sum Overpayement - Is it the right thing to do?

stayhungry

Hello All,

First post, so please be gentle...

We have a mortgage with first direct, it is their tracker product which tracks 1.89% above the base rate. The mortgage balance is currently approximately £140k.

We have approximately £5K that we have saved (above and beyond our usual 'safety-net' savings) and we are trying to establish if paying this off the mortgage is a sensible option?

I've spoken to first direct and have been left a little confused. They stated that neither the term or the monthly repayement would be reduced as a result of this payment, but the balance would reduce when re-mortgaging.

So, basically my question is should we or shouldn't we, what would other people do?

Thanks

blueberrypie

If you pay £5k off your mortgage now, you will owe £5k less, and therefore you will pay no interest on that £5k. That means a savings of 2.39% (your current mortgage interest rate) of £5k per year - which works out at £119.50.

If you put your £5k into an account paying 3% net, you will earn 3% of £5k each year - which works out to £150.

So you can see that your money will be working harder for you in an account paying 3% net. Therefore that is a better option than overpaying on your mortgage. If you haven't both used your ISA allowances this year, that's probably the easiest way to earn 3%.

stayhungry

Thanks, I hadn't really looked at it from that point of view, but I can see the logic - what the 5K can do for us now, in real terms.

Incidentally, we are both up to our ISA limits for this year

Thanks again

kelloggs36

I was about to suggest an ISA if you didn't already have one, or a long term, low risk investment.

blueberrypie

stayhungry wrote: »

Thanks, I hadn't really looked at it from that point of view, but I can see the logic - what the 5K can do for us now, in real terms.

The way to look at it *always* is to ask how you make any particular sum of money work hardest for you.

Incidentally, we are both up to our ISA limits for this year

Then you just need to find a way to earn at least 3% net on your extra £5k. Have a look at the Savings section to see if you can find an account that will pay >3% net.