Paying Lump Sum off Mortgage, advice

fireoyster

I am looking at my options for making the best use of a lump sum.
I am currently paying 6.5% on my mortgage this is due to revert back to 2.5% Nov 1st


My existing mortgage is 93k Left to pay.
55k (end 2016) on interest
38k(end 2022) on repayment
I have 35k savings that I want to use to part pay off my mortgage.


I also have an endowment which will yield about 29k in 2016 years.
I will also be looking to make overpayments with the mortgage rate savings.



What is the best the option? Pay the 35k off the Interest part of the mortgage or the repayment part?


Look forward to your comments.


Fireoyster.

CLAPTON

a little confusing

do you mean you have two mortgages one interest only and one repayment or are you saying you have one repayment mortgage?

all overpayments reduce the capital owed; this will obviously reduce the amount of interest payable as you only get charged interest on the capital remaining.

Sepa74

If your 6+% rate was continuing for much longer I would have said to pay it off the mortgage.

However the new rate is significantly lower and you may be able to get a higher savings rate than that.

When calculating whether you can or not, you need to take into account the tax you would pay on the interest, though, so if you are a higher rate taxpayer the odds are paying it off the mortgage is the correct thing to do.

If the interest rates are the same on both mortgages, then it doesn't matter where you pay it. This is because interest rates are calculated on the balance owed. No matter which way you square the circle, 35K off the balance owed will still reduce the interest by the same amount.

HOWEVER if the two mortgages have different interest rates, pay the sum off the one with the higher interest rate.

I hope this make sense!

atush

Pay off the higher rate one first, but if both are equal pay off the int only one first.

Is this 35K your only savings or do you have more? I would not rec using your only cash to pay off a lump sum, unless you have 3-6 months salary in cash elsewhere.

fireoyster

Hi thanks for that it's in effect one morgage split into interest (with endownmet) when I first bought my flat, then extended the mortgage by moving using repayment for the for the new house.

Thinking pay lump sum on the Repayment Part this will take it down to 20K @ 2.5% arounf £40.00 Per month.
I should be saving £350 a month which I will pay 600.00 Off the interest part every two months.
in 2016 i will have an endownment pay out clear the interest part in full then pay the rest approc 9k on the repayment.

Any views on that route

dimbo61

As long as you keep a good emergency fund of upto £16K in cash ISA,s earning 3%+ Iwould be tempeted to clear a lump sum off the IO mortgage and then overpay while on the SVR

Hurdler

Dimbo's advice is solid - at the moment I have over £10K in a couple of ISAs and next year's allowance will mean I will be as near as dammit to a decent 6 month blanket which will hopefully free up another load of dosh to the mortgage. I have 2 big jobs on the house pending (Double glazing and Guttering) and potential work to do on the flat I rent as we suspect the tenants will not renew and will be moving for their job.