do I pay off the Mortgage?

julie88_2

I am tied into my mortgage os £71,000 till march 2008 paying at 6%. my various savings in internet accounts earing 5% later in the year I will have enough to pay off my mortgage.

But will be hit by a £4,675 penalty.

Should I paid off the mortgage & penalty or continue repayments till march 2008 then pay it off without the penalty.

Any finacial savvy readers help with advice please.

lisyloo

It depends.

What rate of tax do you pay?

Is any of your money in tax free ISAs, if so how much?
or is all the money in tax paying accounts.

It's not possible to answer the question without knowing more about how much tax you are payong on the money in saving accounts.

robnye

will your mortgage company allow monthly overpayments...?

im with the nationwide and they allow up to £500 per month overpayments

this is only worth while if your interest is calculated daily

julie88_2

i pay off 20% extra each month but it only gets deducted yearly, its part of a bad deal from the chelsea building society

julie88_2

I do not pay tax on my savings as I do not work

Charlton_Taz

As a rough guide.....you are being hit by interest on £71,000 at 6%, so that is £4260 a year. However, assuming you have the £71,000 in savings now you are also earning interest of £3,550. Therefore, the net of the two is that you are 'losing' £710 a year in interest charges.

So if you keep the mortgage as it is and have to wait till March 08 (3 years) to pay it off you will effectively 'lose' £710 x 3 = £2,310.

Or

If you pay off the mortgage now you suffer the penalty of £4,675.

Therefore, I'd keep the mortgage as it is.

julie88_2

Thank you for the advice, I will keep it going to 2008 before paying it off.

lessons learnt do not get into long tie ins & and mortgages with interest calculated yearly and not monthly or daily

waterbaby

As someone not knowledgeable in mortgages, thinking aloud...

When you get hold of your savings, couldn't you pay off almost all of the mortgage, say £70,000, and minimise your interest payments while keeping the original mortgage term?

Probably not as you would have to reduce your monthly payment to spread it till 2008 and I can't imagine they allow that.

julie88_2

cannot pay off more than 20% extra per month otherwise there is a financial penalty which defeats that option.

lisyloo

Hi Julie - Charlton Taz is right you should not pay off the mortgage as the penalties are too high.

"i pay off 20% extra each month but it only gets deducted yearly, its part of a bad deal from the chelsea building society"

Why are you doing this?
I would say don't do this until November and December (assuming the calclation years starts in January).
If you pay off money in Jan and Feb then you will still be paying interest on that money until the next January.
Keep it in your savings account instead for the year and get some interest.

I realise that psychologically there is a desire to reduce the debt, but it simple doesn't make sense financially.
Keep it in the savings and get some interest.
The only exception are the final months of the year e.g. December and November when you aren't loosing much.

DiggingOut

lisyloo wrote:

"i pay off 20% extra each month but it only gets deducted yearly, its part of a bad deal from the chelsea building society"

Why are you doing this?
I would say don't do this until November and December (assuming the calclation years starts in January).

Overlooking something here, I think, lisyloo. (Happens to the best of us ).

The most Julie can overpay in any one month is 20%. So she can't save up her overpayments and do them all in November and December, or she will get hit with a fee. If she wants to make overpayments for March, for instance, she has to do it now.

So the maths gets rather complicated. If she makes an overpayment for March 2005, she loses 5% interest for three years (assuming rates stay the same). She saves 6% interest for two years and three months. Leaving out the compounding, which really complicates things, that means that on a £100 overpayment, she would lose approximately £15 that she could have earned in savings and reduce her mortgage interest by about £13.50. Conclusion -- a March overpayment is not a good deal (again, assuming the annual reset date is the end of the calendar year.)

Assuming interest rates do not change, a £100 overpayment made anytime this year will save £13.50 between now and March 2008. The breakeven point, then, is when that £100 payment will cost less than that in interest on savings, which is approximately August, so beginning in August she should make the maximum overpayments allowed each month. If rates change the month may change as well, but not significantly unless the gap between savings interest and mortgage interest rates changes.

Next year (assuming the same rates) she should begin making overpayments in September. In 2007, only in November and December.

Julie, I'm assuming you have your savings earning daily interest. Since you don't receive any interest benefit from your overpayments until the end of the year, but have to make them within particular months, I would make sure that you are making them at the END of each month that you make overpayments, so that you can earn the interest on that money throughout the month. Maybe not the very last day of the month (you want to make sure it gets credited in the proper month), but certainly the last 3-4 days of the month.

As far as actually paying off the mortgage entirely, some mortgages have provisions where the prepayment penalty decreases over time. If that is the case with yours, you may want to reevaluate the decision not to prepay when the penalty decreases.