how best to use money

tomloaf

Hello

I need some help as my head is spinning with the maths
My now wife and I have recently come into a little bit of money after our wedding about £4500. We currently owe about £60,000 left on our mortgage and I would obviously like to use this money to pay off some of this. We currently have a repayment fixed rate mortgage at about 5.5%. We can only pay back and extra of 10% off each year and have already done this. If we pay over that the extra money is charged at 4%. Do I use this money to pay off some of the mortgage now or pay it off in the New Year as we still have another 2.5 years left on the current mortgage deal before going variable

The next question is I will be inheriting some money as my father dies recently. We are looking at moving in the next 6 months so do I use the money to pay off the mortgage as soon as I get the money (again being charged 4% and an early repayment fee of about £3000) or do we just use it as part of the deposit for the new house

Help with working would be useful

Thanks
Tom Smith

tootallulah

I wouldn't pay off anything and be charged for it! I would get the money into the best account available and treat it as the overpayment pot with the aim being to pay off 10% of teh mortgage for the next two years and also build up a pot of money to bring down the mortgage as far as possible when you move to variable rate.

As for moving, I would keep any funds available ready for a down payment on the new house and consider very carefully whether the current house could become a rental property. The rental market is very strong and this might be a good time to get someone else paying the mortgage off on something that can be a significant part of earnings/pension in thefuture.

adwat

Hi Tom

You'd be best off paying off the whole lump sum and paying the 4% early redemption charge. You'll soon recover the redemption charge in the interest you'll be saving each month.

Mc_Marty

Hi Tom,

I to have been considering the same scenario - we have 5.84% fixed mortgage for another 2.5yrs and have so far this year already used our 10% overpayment allowance and have money sitting in a 2.4% (net) savings account. Our early repayment charge for anything else we overpay this year is 4%.

In our situation like yours is that the mortgage rate is higher than ERP charge and on that fact alone it does seem to make sense to overpay. However if you then factor in things like we are already in September, therefore only 3 months away from the new year when we get a new 10% overpayment allowance. So if we paid extra in this year at 4% charge we would only really be getting 3 months of reduced interest charges before we could have overpaid without any early charge. So i think overpaying in this way is only really beneficial if done at the beginning of the year (when you have already used your 10% in one big payment) because then you get 12 months of reducing interest rates that then make up for and surpass the 4% loss you incur.

Also a further factor to think about is that by over-overpaying that you are reducing the value in later years that the free 10% overpayment is worth (because the 10% is based on the current balance of the mortgage each new year), so in a way you are paying 4% for the pleasure of not being to overpay as much for free later in the mortgage.

You've said your mortgage is fixed for another 2.5yrs but you hope to move in 6 months, so i would have thought that whether or not you overpay the savings/inheritance, by moving during the fixed mortgage period you will essentially be 'remortgaging' and therefore will be repaying the current mortgage deal early and will incur the 4% ERP costs anyway? So in this case maybe it seems best to put the savings/inheritance into a standard 3%(gross) savings account and earn a few months interest before you use it as a deposit.

That’s my take on it, maybe someone else agrees/disagrees?

Sepa74

I would agree with McMarty's analysis.

Even if your mortgage is portable and you're not going to be paying the 4% redemption fee, it is crazy to pay now and be charged 4% when you can use the money as a deposit in 6 months time. This goes for both sums - put them both in the highest interest earning account you can find and then use it when you buy your new house.

tomloaf

Thank you all
Advice is much appreciate

dimbo61

If you dont move check and see if you can reduce the term !!!!
This means a much bigger mortgage payment each month and so reduces your debt quicker.
Use your savings to make up the higher mortgage payment each month.
I paid my lender £50 to reduce our term from 22 years down to 10 and you could reduce yours down to 2.5 years.
Just ring the mortgage centre and ask ? can I reduce my term