Calculation advice

Llyllyll

Using Ali's calculator I have come up with the following rough figures (using 6% IR for years 1 to 3 and 6.5% for years after that).

Option 1
Mortgage (13 year term, 3 yr flex started Aug 06) - £57,000
Monthly overpayments - £100
Lump sum paid in 1st year (Feb 07) - £15,000
Mortgage will be paid off in year 7

Option 2
Mortgage (13 year term, 3 yr flex started Aug 06) - £57,000
Monthly overpayments - £200
Lump sum paid in 1st year (Feb 07) - £12,000
Mortgage will be paid off in year 7

Option 3
Mortgage (13 year term, 3 yr flex started Aug 06) - £57,000
Monthly overpayments - £100
Lump sum paid in 1st year (Feb 07) - £6,000
Mortgage will be paid off in year 8

Option 4
Mortgage (13 year term, 3 yr flex started Aug 06) - £57,000
Monthly overpayments - £200
Lump sum paid in 1st year (Feb 07) - £6,000
Mortgage will be paid off in year 8

Options 1 and 2 would mean using all/most of our savings respectively. Options 3 and 4 would allow us to pay a lump sum while also keeping a few months worth of wages (each) as savings.

Option 4 is the one I am favouring at the moment as it seems to be a practical compromise between overpayments and a lump sum while allowing a reasonable standard of living.

Grateful if anyone could confirm my rough figures just so that I know I'm on the right track.

Thank very much.

jamesd

Where does the lump sum come from? Hopefully not an ISA, which will save you tax on interest for many years after the mortgage ends.

One other option is 6000 in stocks and shares ISA and 200 a month added to it. 9% after fees is readily achievable and that would reach 35000 in 7 years, probably paying off the mortgage then. Not sure because I don't know what the target is (initial mortgage and normal monthly payment) and had to estimate it from your figures. 12000 plus 200 a month would reach 36800 in 5.5 years at 9% investment return.

Llyllyll

Yes, the £6k would be from ISA's.

I thought that the interest charged on the mortgage would far outweigh anything I was getting from the ISA's.

Thanks for the stocks and shares ISA suggestion. Wife and I are not really risk takers (not as long as we have a mortgage anyway) so what sort of risk is there with these? I will also look into this myself...

bunking_off

Llyllyll wrote:

Using Ali's calculator I have come up with the following rough figures (using 6% IR for years 1 to 3 and 6.5% for years after that).

As a reference point, would I be correct in thinking your standard monthly payments are approx £530-535/month?

Llyllyll wrote:

Option 1
Mortgage (13 year term, 3 yr flex started Aug 06) - £57,000
Monthly overpayments - £100
Lump sum paid in 1st year (Feb 07) - £15,000
Mortgage will be paid off in year 7

I make this approx 6yrs 10 months.

Llyllyll wrote:

Option 2
Mortgage (13 year term, 3 yr flex started Aug 06) - £57,000
Monthly overpayments - £200
Lump sum paid in 1st year (Feb 07) - £12,000
Mortgage will be paid off in year 7

I make this approx 6yrs 3 months.

Llyllyll wrote:

Option 3
Mortgage (13 year term, 3 yr flex started Aug 06) - £57,000
Monthly overpayments - £100
Lump sum paid in 1st year (Feb 07) - £6,000
Mortgage will be paid off in year 8

I make this approx 8yrs 8 months.

Llyllyll wrote:

Option 4
Mortgage (13 year term, 3 yr flex started Aug 06) - £57,000
Monthly overpayments - £200
Lump sum paid in 1st year (Feb 07) - £6,000
Mortgage will be paid off in year 8

...and this one 7yrs 2 months.

(All of the above based upon interest being charged monthly, at 0.487% for first 36 months, 0.526% thereafter)

Jamesd is correct about the value of the ISA tax wrapper, but much of this depends (a) whether you're a 40% taxpayer and (b) whether and to what degree ISAs continue to accrue tax benefits..e.g. compare today's ISA with a PEP of a few years ago and it's a sorry substitute. It's a question of balancing a possible/probable gain in the future (benefit of tax free return on savings) compared to a gain today (savings on mortgage are better than you'd get from a cash ISA)....if I wanted to value that in a sophisticated manner, I'd involve time value of money & Net Present Value concepts...

Note that - as I think you've worked out - if you put money in any share-based investment, you're defacto borrowing money (in context of not paying back your mortgage as quickly as otherwise) in order to invest in non-risk-free investments. Not saying it's the wrong thing to do, but would say that you need to keep that risk element in mind (financial theory dictates that if shares really were risk free, they'd only return the same as a bank account - the higher return is there to reward risk taking).

To answer your original question, much depends on whether you've got a conventional or off-set/flexible mortgage. If the former, then I think you're on the right track as it's sensible to keep a few £k tucked to one side for rainy day occurances. If your mortgage allows you to reborrow readily, then I'd go for Option 1 or 2.

Llyllyll

bunking_off wrote:

As a reference point, would I be correct in thinking your standard monthly payments are approx £530-535/month?

Approx £510 at the moment (5.99%)

Thanks for the clarification of the time scales I had set.

bunking_off wrote:

To answer your original question, much depends on whether you've got a conventional or off-set/flexible mortgage. If the former, then I think you're on the right track as it's sensible to keep a few £k tucked to one side for rainy day occurances. If your mortgage allows you to reborrow readily, then I'd go for Option 1 or 2.

It's a flexible one. Thanks for your info - plenty of stuff for us to consider there...

jamesd

If there is one cash ISA which has 15000 in it, or could have by the middle of April with 6000 added to it from the other (300 this year, 3000 in the new tax year), you can get 5.75% from the Ruffler Bank cash ISA. I hope that's a higher interest rate than your mortgage. If it is, that pays better than paying off part of the mortgage.

If that's not doable, you can get 5.46% from the Kent Reliance Building Society.

Both of those rates are directly comparable to a mortgage interest rate, so if they are higher than your mortgage interest rate, they will make you more in interest than you save in mortgage interest, meaning you accumulate the money to pay the mortgage off faster than by overpaying on the mortgage.

There is some risk in the funds in stocks and shares ISAs, mainly that the markets could be at a low point at a particular time when you must sell. If you don't have that risk - and you don't, since you can choose when to pay and delay if the markets are low - then the risk is much reduced. Here are some examples of multi-manager funds that have averaged a return of 9% or more for the last five years, after fees:

CS MMgr UK Growth +10.5%
New Star Global Strategic Capital Unit Trust +12.6%
M & G Fund of Investment Trust Shares +11.4%

The charts linked to give some idea of the variability.