Early repayment charges - should I take a hit now?

thrifty2spend

Hello, I wonder if someone better at figures would be able to help.

I am in the first year of a two year variable rate mortgage at 2.79% above the base rate (2.79 + 0.5, rate currently 3.29%) paying approx £400 a month. I want to overpay but can only do 10% of total mortgage (£95,000) for each of the first two years without attracting charge.

Early repayment charges for the next 12 months are 3% of amount repaid (on anything over the first 10% in the year), and next year they will be 2%. Overall, if I were to pay the full mortgage off (I wish) the total charges I would incur are approx £2,800. The charges would be nil after the second year. However...

With the BOE rates being so low now, would it be cheaper to attract ERCs on any amount over the 10% and balance that hit against the interest saved along with possible interest rate rises over the next 24 months? Surely I would be paying more than £2800 in interest alone by the end of the second year?

I aim to pay the mortgage off completely by 2013, so I am in a good position to throw money at the mortgage, much more than the 10%.

Thank-you!

BFM

I wouldn't think it makes sesne to overpay more than the 10%, the simple maths is:

overpay = benefit is 3.29% - 3% ERC = 0.29%

stick what you would overpay into something earning even 3% less tax = 2.2% or so - and as long as you dont spend it it'll be there to overpay when tyhe two years is up, or if interest rates rise such that the maths is different.

foreversummer

I would just save the money in the highest paying interest rate account you can find and wait until you are out of your penalty period. Doesn't seem any point in attracting ERCs at this time.

Nobody knows what interest rates will do so there isn't a definitive answer. IMHO you might as well keep your options open at this stage.

Foreversummer

getmore4less

If you are not using your ISA allowance Barclays have a ISA tracker at 3.25% (there may be better but this better than taking 3% hit)

So you can save another £5340 min, potentialy £20880) at net cost of 0.4% for a year.