Is mortgage overpayment worth it (even with a penalty)

MichaelS_3

Hi,

I have a nationwide 5 year fixed mortgage on a rate of 4.5%. It's been going just under a year and I have about £170k left to pay off. I've inherited some money and could make a lump-sum payment of £30k to reduce the term of the mortgage.

Nationwide allow up to £500 a month in overpayments without charge, but I've been making these anyway. Whilst I'd like to pay off the mortgage a bit, there is a 5% charge on anything above the £500. So, I think - no point in paying the 5%, I'll just put the £30k in an account until the 5 years is up and pay it off then.

But savings interest is so rubbish (after tax much much lower than the 4.5% I'm paying for the mortgage) I figure that I might be better off paying in an additional amount, even with the 5% penalty. I'm slightly stumped though on how I go about working out whether it is worthwhile.

Thanks,
Michael

luciano

Hi Michael. If you have 5 years you can think about national saving bonds (nsandi.com). They do 5 year deals and pay 0.5% over inflation. Bank bounds is lossing money as those are always below the inflation. If you wan to play with some repayment strategies I recommend you this tool mortgagelabs.co.uk
I hope that will help

AliBongo73

Nationwide have said you can only make overpayments of £500 per month until the term ends in 4 yrs time. What about asking them if you can reduce the term of the mortgage - ie if your remaining mortgage term is 15 years and you have the rate fixed for the next 4 years, see if you can reduce the overall term down (eg from 15 yrs to 10 yrs). They might make a charge for this, but probably less than the 5% charged on overpayments. They would need to look at affordability (showing them proof of this money from the will may help). The effect of this would be that your monthly payments would rise, but you would be clearing the mortgage much faster and paying a huge whack less interest. They may of course say it is not allowed, but it is certainly worth asking - the worst you could hear is 'no" and you would be no worse off than you are now. Alternatively I am sure there are on-line calculators or maybe Nationwide could tell you how much you would pay and you could work out how much you would earn in interest if you saved instead.

Cat2011

here's the link to the MSE calculator

http://www.moneysavingexpert.com/mortgages/mortgage-overpayment-calculator

The charge on 30k would be 1.5k, so you'd actually be paying off 28.5k. That saves you 6 years and ~47k in interest. I reckon you'd be better off paying it off. Although once the money has gone, it's gone, so make sure you've still got some money in a savings pot in case the !!!!!! hits the fan.

getmore4less

If the £500pm is sustainable from income it makes the calculations a bit easier.

£28571 off the mortgage and £1429 fee. is £30k total

Almost certainly save money over just saving it.

If looking to change term check if you can split the debt into 2 some with a 4year term(end of fix) and the rest on the normal term.

This will use up the £30k over the 4 years but not leave you with a long term commitment to higher payments.

It might be more efficient than just paying off a lump.