Pay off the mortgage or invest?

Joto_2

Hi I'm after a bit of advice if anyone can help. I have a mortgage of £156,000 paying £903.00. I'm locked into the mortgage(tracker) until Sept 2007 I can now pay off £100,000 but will have to pay £670 in redemption fees. I'm advised that £606 of the £903 I'm paying is in interest so it is worth paying the redemtion fee UNLESS I can earn more over the next 9 months with a high interest account etc.
I'm not very up on all this - I'm usually looking at the lowest loans so any help will be helpful.
Thanks

jamesd

You should be able to earn 3986 before tax on 100000 at 5.35% AER for 9 months. After basic rate tax that's 3188.80, after higher rate 2391.60.

Interest on the mortgage for 9 months at 606 comes to 5454. Paying it off now would save you 1595 at basic rate tax, 2392 at higher rate tax.

If you invest the money you'd be likely to pay off the whole mortgage in 5 years, assuming 9% investment growth after fees. Personally I'd go with the invest and pay it all off option, but it's definitely a matter of personal preference and comfort with risk.

Ian_W

Or if you put it in the A&L Direct Saver at 5.64% you'd get about £370pm after basic rate tax is deducted. If you're a higher rate tax payer you'd have to declare and pay another 20% on Self-Assessment, if you're a non-tax payer you could fill in a form to get the interest tax free. See
https://www.alliance-leicester.co.uk/savings/index.asp?page=dsaver&ct=savingshome

On the face of it looks like you'd be better paying the penalty BUT to be sure you'd need to know what the interest would be each month on the balance of the mortgage after you'd paid off the lump and what rate you can get thereafter either from your current lender or by remortgaging for the lower amount.

James is right that if you invested it for a few years you'd PROBABLY be able to repay the whole mortgage but it would involve some risk, doesn't have to be high risk but it certainly wouldn't be risk free.

jamesd

Ian W, not really a probably about investing paying it off, assuming sensible investment choices. The variation is in how long it takes and whether there happens to be a market crash at the intended payoff date or not - which could cause a delay until the market recovers if funds weren't shifted to lower volatility first.

roswell

A nother option would be to go offset if the amount of interest you are paying is your main concern, this means you wont earn interest on your savings but you want pay interest on the mortgage for the same value eg you would only be paying interest on £56,000 not £156,000

Joto_2

Hi Everyone. Thanks for the advice. My husband is a higher rate tax payer, I'm not. We want to pay off our morgage asap, unless we can earn more from our investment and it's just a case of working out which is the best way to go. We can pay off an extra £500 without penalty each month and thought if we payed the £100,000 off we could always keep our current dd almost the same and so pay it off quicker. I don't know how long it would take to pay off the £56,000 at £800 a month. The other option I hadn't considered is if we are going to pay a redemption fee whether it is worth moving from the tracker we have with Nationwide and see if we can get a better deal. There is so much to consider and I don't fully understand all the implications.

Xbigman

£670 is peanuts compared to what you will save in interest and it pays for itself in 6 or 7 weeks.
Switching deals to save the £670 is not an option because to switch you will get charged an early redemption penalty on the whole amount of the mortgage anyway.

If you have already made a general decision that you want to pay off the mortgage then the sooner you do it the more you save.
Regards



X

dunstonh

My husband is a higher rate tax payer, I'm not. We want to pay off our morgage asap, unless we can earn more from our investment

Its usually worth higher rate taxpayers getting as much into ISAs as they can (£7k maxi). The ISA is an annual allowance which is lost forever if not used. The ISA can give tax savings many many years after the mortgage is long gone and that has to be considered depending on your requirements and situation.