Mortgage advise please?

seanandde

My partner and I are three years into a 16 year term tracker mortgage (£60K on a house value of, now, approx £160K) with the Chelsea. It was set up as interest only as a result of my ill health and thus relying on only my partner's income. I'm just about to ease my way back into work but we're reluctant to transfer the mortgage immediately onto repayment as we're not sure how I'm going to hold up, work wise in the short term - my income may be sporadic but, when it does come in, it'll be in lump sums of anything between £2.5K - £4K due to nature of my work, several times per year.

So our plan is to overpay as and when we can for the time being. Spoken to the Chelsea today and the mortgage seems very flexible; interest is calculated daily, there's no limit to how much we can overpay and this can come off the capital. It transpires that when the fixed period is up (May 2013) it will revert to 1.3% above the base rate for the remainder of the term.

Given that we have nothing else in place to pay back the loan at the end of the term and we don't want to transfer it to repayment until I'm completely well, does making large, lump sum overpayments for now seem to be a reasonable option?

Be most grateful for any advice - we're both a bit mentally challenged when it comes to the mortage!

hcb42

it gives you flexibility as long as you are disciplined and set yourself some clear payback targets for the £60K O/S amount...over the period of the mortgage.

Thrugelmir

seanandde wrote: »

Given that we have nothing else in place to pay back the loan at the end of the term and we don't want to transfer it to repayment until I'm completely well, does making large, lump sum overpayments for now seem to be a reasonable option?

Yes, very sensible.

May be worth finding out the rate at which you would need to pay if the mortgage was on a normal repayment basis. So you have a benchmark and can quantify the impact of the overpayments you make.

seanandde

Thank you, much appreciated. We've become incredibly well financially disciplined over the last few years, though I guess that's the case with so many people. I don't think we'd have a problem with sticking to our targets; penny pinching seems to have become second nature Our mortgage has, thankfully, been stupidly cheap for a couple of years but we realise the (almost) free ride isn't going to last forever.

Thanks for the tip on sussing what it would currently be for repayment/monthly; that should have been on my list of questions for the Chelsea this morning. I'll check that with them.

blueberrypie

seanandde wrote: »

So our plan is to overpay as and when we can for the time being. Spoken to the Chelsea today and the mortgage seems very flexible; interest is calculated daily, there's no limit to how much we can overpay and this can come off the capital. It transpires that when the fixed period is up (May 2013) it will revert to 1.3% above the base rate for the remainder of the term.

That's a very good rate. What is your current rate - the one you're paying until May 2013?

seanandde

It's 1.04% over the base rate which, to my shame, until starting to look at/think about the mortgage over the last few weeks, I had no idea whether good, bad or indifferent. We'd thought that, at the end of the 5 year period, it would revert to whatever their SVR was in May 2013 but they've confirmed today, no, it'll be fixed at 1.3% over the base rate for the remainder. I'm dreading thinking about the possibility of changing it if interest rates rocket; I've not a clue... I think we just got lucky with the current mortgage, recommended at the time by a broker. Fortunately, there's no early redemption(?) fee... but I'm trying hard not to think about anything mortgage related other than paying off the damn thing.

blueberrypie

seanandde wrote: »

It's 1.04% over the base rate

Given the low rate you're on now, and the low rate you'll continue on, it is probably better to save rather than overpay.

For example, if you had £10k now, you could put it into two cash ISAs (one in each of your names) earning 3%. After a year, you would have made £300 in interest, and you'd have £10,300 to reduce your mortgage balance.

By comparison, if you paid £10k off your mortgage now, you would save only £104 in interest over the next year, and your mortgage balance would be £10,104 lower than it would otherwise have been.

As long as you can earn higher net interest on your savings than you are paying on your mortgage, and as long as you are disciplined enough to keep the savings and not spend them, you will eventually be able to reduce your mortgage faster than if you were to simply start making extra payments to the mortgage provider.

If/when interest rates rise and you can no longer earn a higher interest rate on your savings, you withdraw the savings and apply it to your mortgage. For that reason, you should keep the savings in an account with fairly easy access.