Should I repay £30k part of interest only fixed mortgage

Stigofthedump_2

Hi some general advice needed please - I'm novice at forums for forgive my inexperience.We have £63K remaining on initial advance mortgage fixed at 5.63% until 30/4/2013£30k of this is interest only remaining is repayment.We are currently paying the maximum overpayment allowed of £500 monthly.The repayment vehicle we have is a stocks and shares ISA and the last statement indicated we have reached the £30k required to repay the interest only part mortage. (We already stopped the monthly payments to this and diverted the additional amount to directly overpaying mortgage)If we pay this amount we will incurr redemption penalty fee of £900 (3% of the amount repaid over £500 allowance)The lender tells me we pay £296 interest /month (£4440 in 15 month remaining on fixed rate)We have a further advance which we currently pay at base rate with no overpayments.My questions:Should we pay off the £30k now, incurring the £900 fees - any money saved on interest and monthly repayments would be diverted back to the ISA or should we wait until fixed rate is over in Apr 2013 and we switch to base rate with no penalty for overpayments?Are there other considerations we should make such as tax free growth with money in ISA?Is that enough info to give me an answer???Many thanks

holly_hobby

Hi Stig,

Have the regular £500 overpayments been apportioned to the C&I or interest only element of the mge ?

For ease, I am assuming that its all been credited to the C&I account, and you still have full 30k (interest only) o/s on a fixed of 5.63% - this equates to a monthly repayment figure of £140.75 ( or £1689 pa) of your current monthly mge payment (i.e 30k x 5.63%/12 = £140.75).

You have 15 mths left on your current fixed rate which means equivilent os payment of 140.75 x 15mths = £2,1111.25, before you can repay a lump sum without penalty. So in simplistic terms - you will be paying £2,111.25 to save yourself £900.

i.e for an initial penalty fee of £900 (i.e 3% ERP), you will actually save yourself £1,211.25 over the same term.

Obv if your regular lump sum payments have been equally apportioned between the 2 accounts (C&I and I/O) then the calc figures will be slightly different (but I have given you the v simple forumula as to how to work out interest only repayment sums).

The further advance (FA) you have, you state is currently on SVR, which despite having no ERPs will no doubt be on a lower rate than the 5.63% product, part of your mge is currently locked into. So although generally advice would be to reduce the element of your mge that will not suffer any charges, I don't think its appropriate in this case. (for max savings to be achieved over the same term).

If I were in this position, I would happily swallow the £900 ERP for overall savings (as I doubt that your ISA is returning anywhere near an equivilent 5.63% net return, although if I am wrong and it is, we need to factor this into the equasion too)

Hope this helps ... sure others will be along with comment and advice to assist...

Holly

Stigofthedump_2

Just checked with Nationwide: Overpayments are reducing the overall balance - we still owe full £30k on interest only.

Our required monthly payments on this portion of mortgage are £580 and we add another £500 onto this.(total £1080)

I'm not clear how you calculated the £140.75 c- can you explain further plus what is o/s?

What does seem clear is that it is worth taking the £900 hit for the overall savings over the term.
I've also been told that we could continue to pay the same monthly £580 amount rather thaqn have our montly payments recalculated to £326 which would allow us to effectively overpay a further £254 monthly.(is keep up the £1080 payments) - I guess that would be better than investing the £254 back into the ISA?

Stigofthedump_2

Forgot to mention the further advance is currently 2.5% and we dont overpay any on that portion

holly_hobby

Not sure how your overpayments are reducing the whole mge - but you still owe 30k interest only ?

Working out what the applicable repayment figure on interest only is quite easy ... as noted in my initial post..

You say you have 30k on interest only @ 5.63% interest rate for the next 15 mths.

So, 30k x 5.63% = £1,689.00 (which represents the annual interest repayable on the given figs).

Therefore, to determine your monthly amount payable on interest only @5.63% is you simply divide 1689 by 12 = £140.75 pm. (which over the next 15 mths = 140.75 x 15 = £2,111.25 payable at this rate over the remainder of the fixed term)

However, by paying a £900 ERP now, you would effectively save £1,211.25 in respect of I/O payments over the same period. i.e £2,111.25 - £900 = £1,211.25

Interest only repayment figs are unaffected by the term of the mge, as the balance on which they are calculated reamins unaltered throughout the term (notwithstanding any lump sum payments made)

It would appear that Nwide are quoting the total amount of interest payable on the entire mortgage - which will include that applicable to the C&I element, as if the interest figs they have given are in isolation to 30k interest only borrowing, they are clearly inaccurate (unless you are including the cost of your repayment vehicle).

Hope this helps

Holly

getmore4less

What are your extra borrowing and follow on rates you say base but that is unlikely. did you mean SVR or base+X%.

You will just recoup the fee over the 15months against the option of saving.

mortgage interest £2211
£30k for 15 months at 2.5%(net apr) £995 fee 900 total £1895

Saving £316

holly_hobby

getmore4less wrote: »

What are your extra borrowing and follow on rates you say base but that is unlikely. did you mean SVR or base+X%.

You will just recoup the fee over the 15months against the option of saving.

mortgage interest £2211
£30k for 15 months at 2.5%(net apr) £995 fee 900 total £1895

Saving £316

Would wager OP means SVR, also the FA @ 2.5% is not on 30k - OP hasn't given a fig yet. (unless I've missed it )

H

JimmyTheWig

OP, What are the terms of your ERC?
You've said that you would have to pay 3%, which is fair enough, but what about if you held off for a few months? Some mortgages have ERCs where you pay so much in the first year, a bit less in the second year and less still in the third year, etc. If by waiting a few months the ERC would drop to 2% then I'd say this was worth waiting for.

If it's a question of doing it now or waiting 15 months to pay no charges then you need to consider what return you wuold need to get on your money to make it worth not paying the charges.
3% fee over 15 months is the equivalent of 2.4% a year. So to be better off you'd need to be getting 3.23% on your savings (5.63 - 2.40 = 3.23).
Whether you get this return on your ISA is dependent on stock market performance. Your £30k ISA might drop in value in the next year or it might go up by more than you'd have saved in interest. We just don't know.
Looking at http://www.moneysavingexpert.com/savings/savings-accounts-best-interest, you could get 3.51% on your savings if you fixed the rate for a year. If you (or your spouse) don't pay income tax then this would be better than taking the ERC hit and overpaying your mortgage. But if you pay basic rate tax this will be the equivalent of 2.81%, in which case overpaying the mortgage would be better.
Another option would be to take money from your ISA each month and pay it into a regular saver. These can pay as high as 8%. But you'd need to do this with £2500 a month, which would mean opening many regular saver accounts, which is probably not worth the hassle. The thing I like about this plan, however, is that it will smooth the stock market fluctuations on your ISA balance. It would be really annoying if the day you withdrew all of your money was a really bad day for the market. If you do it over 12 months then the chances are you'll get some good days and some bad days.


To summarise...
1. Find out if your ERC will go down if you wait a few months.
2. Decide whether you think it is worth leaving your money in the S&S ISA (i.e. what do you think the stock market will do) and consider how you want to withdraw the money.
3. Consider the 3.51% interest one year savings account if you (or your spouse) don't pay income tax.
4. If none of the above work for you then pay the balance off the mortgage.

Stigofthedump_2

holly_hobby wrote: »

Would wager OP means SVR, also the FA @ 2.5% is not on 30k - OP hasn't given a fig yet. (unless I've missed it )

H

The FA balance outstanding is around £34k and we are paying 2.5% - this was the rate after the fixed period ended so must be standard variable rate....I know not fixed and not tracker.

holly_hobby

Stigofthedump wrote: »

The FA balance outstanding is around £34k and we are paying 2.5% - this was the rate after the fixed period ended so must be standard variable rate....I know not fixed and not tracker.

Is the 34k (penalty free) FA - based on interest only or C&I ?

Even so, I do stick with my original view of redeeming the 30k I/O element @5.63% (which is over double of that being charged on the penalty free further advance).

My choice is the above, rather than partially repaying the 34k FA simply because it has no pens, or delaying total repayment of the 30k @5.63%, with a possible loss of value of your ISA, or withdrawing your ISA & trying to source a savings home with a net growth of circa 5.63%, all with the objective of saving an ERP of £900.

Prudent financial advice is always to reduce debts before investment, as you will always be charged more interest on borrowing that you will achieve on saving.

In recent times of historically low interest, this basic fact may now not always be accurate - in this case though I think you will struggle to find an ISA or net savings vehicle, with a similar risk profile to an ISA, which will provide you with a net return over the coming 15 mths, equal to or in excess of the 5.63% your debt is incurring.

But the choice must be yours, as my comments are based on limited personal info and therefore informal, and do not (although I am suitably qualified) constitute advice in any professional capacity.

But I do hope this helps

H

JimmyTheWig

OP, Looking back on my post (#8) I can see that you might get lost in the waffle of it all. But I do suggest you read the summary at the bottom of the post.