overpay monthly or lump sum ?

motherofstudents

I hope I'm in the right place, any advice is appreciated.

Our mortgage has 8 years to go of the original 12, 6 of them on a fixed rate of 5.2%. The original amount borrowed was £83000 and we now owe £63600. My question is which is the better option, overpay by £500 a month which we can do with no penalties, or pay off £40000 as a lump sum and a £1200 penalty. Nationwide have said if we pay the lump sum our payments would reduce to £278 a month but we could continue to overpay £500 and it would be paid off in two years. I would just be interested to hear views on which people would do as I can't see one option being so much better than the other (but maybe I got my maths wrong). I feel a bit uneasy about paying £40k and having no savings to fall back on but on the other hand with interest on savings not being very good it seems to make sense to pay off most of the mortgage. We would be mortgage free in two years paying the lump sum and four years with overpayments. What would you do ?

dimbo61

Just pay the £500 a month allowed and dont give your lender one penny in ERC,s
Any spare money put into either cash ISA,s or regular savers or maybe into the students accounts!!!
OK MUM!
This also means you have a good emergency fund and the ability to pay "cash" for big items like cars and not take expensive finance

dazedandconfused_123

I agree with Dimbo

Make monthly overpaymentsfor now.... and if you still like the idea of a lump sum payment you can still do that when your penalty period is up!

Don'y pay ERC's-it's better in your pocket than the lenders

CH27

I agree with dimbo & dazed.

dimbo61

Can you ask the Nationwide to reduce your term so that it finishes at the end of the fix!
That way you will be paying more each month so drip feed the extra from your £40K in savings.
Are you paying about £811 a month now ?
If you reduced the term to 2 years your mortgage would increase to approx £2800 a month so just use the £40K to make up the difference each month.
I had to pay my lender £50 to reduce the term and by doing this you will save £7000 in interest, be mortgage free in 2 years and still have a nice emergency fund! Plus you wont have to worry about interest rate rises.
worth a phone call to the Nationwide dont you think MUM as you wont earn 5.2% tax free from savings

Peelerfart

Agree with above - rather stick termites down me Yfronts than pay ERC's.

motherofstudents

Thanks everyone for replies. Not sure about paying into student accounts, they've had enough out of me:)
oooh termites, don't like them.

I will contact Nationwide and see what they say dimbo, cheers Mum

noodle

ERC's can be worth paying - it depends how they are calculated, and what other options you have for your money. I pay them because I save more than I would make by putting the money elsewhere (on the basis that I don't want to put the money at risk). This works because my mortgage provider (HSBC) steadily reduces the ERC over the period in which they apply. I'm happy that I'll never need the money for anything else.

You might be able to get a better return on your money by saving it than I can, if you've got it all available in a lump-sum now which could be put on a long-term deposit (though you would lose access).

The best thing to do is always to do the maths and see which leaves you better off, and then consider whether you think you will need the money for anything else - and bear in mind that if the possibility of that is only small you would probably have the option of getting it back out of your mortgage anyway (albeit that you'll then have incurred ERC's but, perhaps, not got the interest benefit).

There seems to be hostility on the board towards ERC's. That's silly.. there's nothing wrong, in principle, with banks levying them when they have made a long-term commitment to your deal and you are going against that... but it depends on how they work them out. Someone who makes themselves worse off because they don't like banks charging ERC's is an idiot.

£1,200 for repaying £40k is only 3% - which is about what I'm currently paying, and we have comparable interest rates too. You will earn back your penalty in about six months with interest saved, and you're in profit from then on... effectively earning 5.2% interest, tax free. Unless you can comfortably beat the market by putting your money elsewhere, I think you're probably better off paying over the lump sum.

dimbo61

Noodle may well be right but try and look at other options such as reducing the term!
now I got my maths wrong big style as £2K extra a month is £48K over 2 years and you only have £40K so that might be a bit much to clear the mortgage in 2 years but if you could reduce the term to say 3 years and use the savings to make big payments each month and use up the £40K asap you will save interest on the mortgage debts and then review things at the end of the fix

motherofstudents

Thanks again. I think I will have to sit down with a calculator (oh dear) and try to work out which would be the best option. I don't have anything against ERCs in principle, I mean we chose to get a fixed rate with Nationwide for 10 years so we are the ones making a change to our original agreement. Unfortunately we bought our house in 2007 and fixed the rate then....It suited us at the time as we knew our payments would not change for 10 years so I'm not really complaining. It is however a bit hard to watch interest rates falling like a stone but if we hadn't fixed our mortgage, I'm pretty sure rates would have increased ! I will mull it over and see what I come up with taking everyone's views on board, thanks, Mum.

dimbo61

" whatsthecost" is a good one