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

Stigofthedump_2

JimmyTheWig wrote: »

Thanks for all the responses, OP. Sorry I suggested you might not come back!

Have you asked your lender if you can switch the interest-only mortgage to repayment? - Yes this is possible
Would there be a fee for doing this? Yes £50 fee
What would the shortest term they would allow you to do it in? They will allow any term as long as we can keep up payments! There's a £20 fee to switch the term. - as example I asked about my payments for reducing from 11yr 8 m to
8yrs - £824
5yrs - £1217.

Can you explain in laymans terms how this might be of use to me and the reasoning behind this questionning. Much appreciated,
Karen

holly_hobby

Hi Karen,

What JTW is referring to is the idea proposed by GM4L

His idea (other than redeem now with a £900 fee - which was my preferred approach due to your ATR and the amount of savings interest that would need to be generated)

Was to ask your lender if you could reduce your current 30k interest only element to capital and interest, over a 15 month term.

Withdraw the capital in you ss ISA - and place in a savings account that produces a minimum net interest return of 2.5%.

You then use the savings account with the capital from the ISA as a monthly feeder account (which just means that you withdraw on a monthly basis, a sum equal to the monthly mge repayment).

here is a copy of GN4L original post ...

getmore4less wrote: »

With £500pm ERC free overpayments

£30900 in 2.5% net savings account with £2575 drawdown will generate £425 in interest in a year and

£2575pm mortgage paid of in 12 months with £924 interest.
(month 13 is £23 payment )

So from the same starting point the op end up with £400 in his pocket.

and his follow up post to my comments

getmore4less wrote: »

NO

The numbers are based on a 15month repayment term(the shortest the lender will probably allow) with £500 (ERC free) overpayments.

Which reduces the balance to £23 in 12 months

Penaty s on outstanding ballance o drop so ZERO once the mortgage has a ballance of ZERO
If there are other penaties the op can leave £3 and pay £1 per month to end of term.

To break even the OP only beeds to find an acount that can generate £23 starting with the £30900 which should be easy.

You will suffer a penalty fee if you fully redeem (which is equal to a zero balance !), within 15 mths, so the last 3 mths you stretch out the repayments until month 16, when you can fully redeem without any ERPs.

It will be a little confusing to the layman I admit .. but on paper its a good alternative of avoiding the £900 if it concerns you, and your lender will let you change to C&I and also reduce your repayment period on the 30k element to just 15 mths.

Hope this helps

Holly

JimmyTheWig

Hi Karen,

That's a great answer. I presume the repayment figures given (e.g. £1217) includes the repayment on your other mortgage, too.
I presume also that you are able to reduce the term of your interest only mortgage without affecting the other mortgage.

I'll now try to explain the question.

You want to pay off your mortgage and you've got the money to do so.
If you pay it off with an overpayment then you will pay £900 ERC. [Note that this is better than letting it run and paying interest for the next 15 months.]
But if you can change to repayment and reduce the term then that will pay off the mortgage in itself. And there would be no ERC to pay. Take the rediculous example (I doubt very much that they'd let you do this) where you reduced the remaining term to 1 month. You wouldn't be making an overpayment and so no ERC, but you'd clear the mortgage in one month!

Now, I think reducing the term to 1 month is never going to be allowed, so lets say you reduce it to 5 years. This will, initially, repay £434 off the mortgage each month. In addition to this you can make a £500 overpayment each month. Do this over a year and you'll have paid off around £10k of your mortgage without paying an ERC on it.
And as long as you put the money you would have used to pay off the mortgage into a high-interest instant access savings account then this will cost you less than paying the ERC.

But to be honest, and I haven't worked it out, I think you'd only be about £100 up doing it this way. It's up to you whether you think this is a lot of hassle for £100 or not.

If, on the other hand, they'll reduce the term to 15 months or even better 12 months then this will save a good few hundred pounds (about £400, I think, though I could be wrong) and I would have thought it was worth doing.

holly_hobby

JimmyTheWig wrote: »

.

Take the rediculous example (I doubt very much that they'd let you do this) where you reduced the remaining term to 1 month. You wouldn't be making an overpayment and so no ERC, but you'd clear the mortgage in one month!

JTW if the OP is on a mge product that has ERPs for a further 15mths.

She will suffer ERP if she redeems at any time, and by any method (ie lump sum or reduced term), before the tie in period expires .

The amendment of a mge term does not alter the ERPs that apply to any product applying to it.

Please take care in any guidance given to the OP re this, and ensure that the basis is correct before advising. As by reducing the term of the mge by any less than the remaining tie in period, will result in the OP incurring the very charge that the process is attempting to evade.

Holly

JimmyTheWig

JimmyTheWig wrote: »

But OP, if you want a short answer, you could do a lot worse than pay off your mortgage with your ISA. You are unlikely to do a lot better than doing so.

Stigofthedump wrote: »

Please try again in more simple terms I have to say I've struggled massively keeping up with all the comments, they are fab and I'm chuffed that you have all discussed this topic so heavily but for a mere mortal with nothing but a maths O'level 30 years ago I'ts all a bit much to take in!

Ok, I can't give advice to you (no-one on these boards is allowed to) but I can tell you what I would tell a friend who had listened to me spouting all the complicated nonsense above and didn't really follow it. I'd say "cash in the S&S ISA and pay off the mortgage, even though it means paying £900 ERC".


My point is that if you follow what's been suggested, you may be able to say £100-£400 pounds. If you don't properly understand it and get it wrong then you could end up significantly down on the deal.
[Edit: I wrote this before reading holly's post #65. This shows the sort of mistake that could be made by getting it wrong, so paying off the whole mortgage now may well be the answer.]

JimmyTheWig

holly_hobby wrote: »

She will suffer ERP if she redeems at any time, and by any method (ie lump sum or reduced term), before the tie in period expires.

I don't understand (though I appreciate that you know more about this than I do).
The ERC is 3% of the amount redeemed (over £500 in any month).
If they reduce the term to 12 months and pay £2577 a month, what will they pay the 3% on?

holly_hobby

And we are back to my initial post.

I do agree JTW with your comments re advice, in any format this should only come from professionally qualified advisers (although I understand that the board does not make distinction), which means that the poster understands and can clearly explain the basis of their suggestions, inc ramifications (& solutions to the OP getting it wrong), and consider all complications before giving advice to the OP.

I feel the OPs limited exposure to investments and financial matters as a whole, leaves her in a disadvantaged position where (without having one to one FA guidance in setting up the suggested route, inc sourcing a suitable deposit medium for the feeder account) errors may be made, which will have a negative financial impact, and that her own comments regarding fully redeeming now, will be (from her position) I feel the most uncomplicated and satisfying route to the desired objective.

Hope this helps

Holly

holly_hobby

JimmyTheWig wrote: »

I don't understand (though I appreciate that you know more about this than I do).
The ERC is 3% of the amount redeemed (over £500 in any month).
If they reduce the term to 12 months and pay £2577 a month, what will they pay the 3% on?

ERPs are on in relaton to the MORTGAGE PRODUCT (i.e a 5 year fixed/discounted/capped rate) that the noted amount of borrowing is secured under, not the overall term of the mortgage as a whole i.e 20 yrs or whatever.

If the product term was say from 5 January 2010 to 5 January 2013 (with ERP within that period) - this means that any form of redemption made within the penalty period will trigger a fee. (notwithstanding any allowable redemptions within the period i.e 10% or the advance, £500, £1 or whatever the lender allows without it triggering the ERP under the particular product terms).

Any repayment os of allowances will be triggered be it by, a lump sum repayment, full redemption in moving lender, or simply reducing the existing mge term to expire within the tie in period i.e in the example before 5 January 2013.

Just like if you had 9 yrs remaining on your C&I mortgage, you wouldn't take a 10 yr fixed rate with ERPs - as your mortgage will be fully repaid in yr 9, yet you will have 1 yr remaining on your tie in period, and accordingly you will incur an early redemption penalty in accorance with the product terms.

If the ERP is say 3% - its generally 3% of the original advance held under the product, not the amount repaid, or 3% of the current os balance at the time ERP is triggered and calculated. (which is the issue I had when it appeared GM4Ls reduced term C&I plan had been calculated over a term of just 12 mths - when the OP had 15 till out of ERP waters).

ERPs tend to reduce over the term, say on a 5 yr deal it wouldn't be unusual to see ..

5% of the amount borrowed years 1 & 2
4% of the amount borrowed year 3
3% of the amount borrowed year 4
2% of the amount borrowed year 5

ERPs work this way as you tend to get lower rates for longer periods, the lender will assess the interest rate reqd to ensure desired amount of profit over the given term. Obv if the capital is repaid early, they have lost out on the remaining yrs of interest (which allowed them to offer the headline rate they did to the mortgagor) - and therefore they require in effect compensation (which is called ERP or ERC), which is based on the original borrowing secured on the rate.

Hope this helps explain why and how ERPs work ....


Holly

JimmyTheWig

holly_hobby wrote: »

If the ERP is say 3% - its generally 3% of the original advance held under the product, not the amount repaid, or 3% of the current os balance at the time ERP is triggered and calculated.

While I have seen products with reducing ERP percentages (which is why I suggested the OP check if they would pay less ERC if they waited 3 months) I'm not convinced that that is the norm.

Are you saying that if the ERC is 5% for a fixed period of 5 years on a 10 year £100,000 repayment mortgage then if you repaid the balance of around £60,000 after 4.5 years you would pay the 5% on the £100,000 not the £60,000?
Ouch, that's harsh!

holly_hobby

It can vary between lenders & products, my own is on the orig borrowing (with my current ERP of 4% of borrowing, its on a sliding scale and initially started off at 6% in yrs 1&2), but I have seen other variations over my many yrs in mges & FS.

The OP wil need to seek advice from their lender or read through their product terms and conditions.

Holly