Should I pay off my mortgage? Discussion area

INSPIRED

tyllwyd wrote: »

Or pay as much as you can this year without penalty, and then pay more the following year? If the year resets at the end of December, you would only have to wait a month or so before you could pay a second instalment without penalty (although obviously check the actual terms and conditions on your mortgage first).

The year starts at November on this mortgage. Meantime, there is £7500 approx sitting in a non interest current account.

I have tried to find a mortgage calculator that will work this out for us.

Thrugelmir

INSPIRED wrote: »

We will need to remortgage in 3 years and would like to have paid off as much of the interest only element as possible. We have been warned that there is little chance that we will get an interest only mortgage. Hence, our wish to pay off as much as possible now - it stands at about £19, 000.

Doesn't matter which part of your existing mortgage you repay. The new mortgage will most certainly be entirely repayment. Affordability will determine what lenders will advance in terms of a mortgage.

INSPIRED

Thrugelmir wrote: »

Doesn't matter which part of your existing mortgage you repay. The new mortgage will most certainly be entirely repayment. Affordability will determine what lenders will advance in terms of a mortgage.

Which is why we are trying to reduce the mortgage. We are almost at retirement age and would rather rid ourselves of a mortgage.

We had endowment policies (remember those!) which should have paid off the interest only element of the mortgage. However, what is the point of having funds to pay off the mortgage if, not only are we made to pay the 2% on overpayment but struggle to find somewhere to deposit the money for a couple of years?

Is there a mortgage calculator that will work out the sums for me?

Many thanks.

Voyager2002

INSPIRED wrote: »

Considering that there are few replies to queries on this thread, posting again may be a waste of time. However, I am not too sure where to seek advice.

Our mortgage is split between Repayment and Interest Only. We want to pay off as much of the Interest only part but are not able to pay off more than 10% of the balance each year unless we are prepared to pay a 2% charge on the difference. That is, if we can only overpay 4000 and want to pay 6000, we will be charged 2% on the 2000 difference.

Our mortgage interest rate is 3.75%. ISAs, savings accounts, TSB, Santander accounts are all maxed out.

Does anyone agree with me that the 2% charge is worth paying? We have over £7000 to spend.

Many thanks.

The net benefit from repaying the 'extra' 2,000 would be 1.75 per cent in the first year, with no tax liability. That is not a brilliant return but is better than a kick in the teeth. Personally I would invest the money and accept a degree of risk, but with the reasonable expectation of a return closer to 5 per cent.

INSPIRED

Voyager2002 wrote: »

The net benefit from repaying the 'extra' 2,000 would be 1.75 per cent in the first year, with no tax liability. That is not a brilliant return but is better than a kick in the teeth. Personally I would invest the money and accept a degree of risk, but with the reasonable expectation of a return closer to 5 per cent.

Thank you - this is what I keep telling myself but am struggling to find anywhere with a return close to 5%. We have seen the return on our stocks and shares Isas plumet in the last 6 months. I will spend some more time searching for a better option before commiting the £7000+ to the mortgage.

dawyldthing

I was with the Halifax and any time I overpaid the interest went down the following month and kep going down. Like once I overpaid £1k and I think it knocked off £8 a month off my interest I was paying (better in my pocket than there's). Plus I overpaid quite a bit (over the 10% and they didn't seem to charge me (I checked it all and couldn't see where they did)

pjcox2005

INSPIRED wrote: »

Thank you - this is what I keep telling myself but am struggling to find anywhere with a return close to 5%. We have seen the return on our stocks and shares Isas plumet in the last 6 months. I will spend some more time searching for a better option before commiting the £7000+ to the mortgage.

Hi, obviously tax to take into account but as two possible options

1) a number of bank accounts are now offering up to 5% on balances http://www.moneysavingexpert.com/banking/compare-best-bank-accounts

2) You could look at peer to peer lenders like ratesetters for a rate around 5%. Slightly more risk but probably still considered pretty low risk.

Hope that helps

Thrugelmir

INSPIRED wrote: »

Thank you - this is what I keep telling myself but am struggling to find anywhere with a return close to 5%.

With inflation potentially heading below 1%. Even 1.75% is providing a risk free return in the short term. Never forget the first rule of investing. Don't lose capital.

jamesd

MoneyDummy wrote: »

We would like to overpay but can not make up our minds whether to do it monthly or save up and make a lump sum. Our mortgage is approx. 1.8% for 2yrs (variable after that, approx. 4.3%) and we have a 123 a/c which earns 3% (before basic rate tax). Do we keep our overpayments in the 123 a/c and earn more interest or do we make monthly overpayments?

In the short run, for the first two years, these are the competing interest rates that you need to at least match overpaying on the mortgage:

tax free or ISA: 1.8%
basic rate income tax: 2.25%
higher rate income tax: 3.00%
top rate income tax: 3.28%

If you can get more than those you're better off waiting. If you match them you're better off in flexibility.

At the moment there are risk-free current accounts like 123 that pay 3% and others that pay 4% on less money.

If you're wiling to take some investment risk you can do things like P2P lending via Ablrate that will probably pay 10% or more gross, with the money secured on the planes being leased. Don't put more than 30% of the money in any single P2P place, though, diversification is important. Others pay more or less with more or less security but all beat your mortgage rate. Much of the money would have been returned after two years but some would have to be sold on the secondary market if you want a strict two years exit. However, with the rates, you don't really need a strict two year exit because it would be better than overpaying even at the higher mortgage rate.

So at the moment it does not seem sensible to overpay because you can save/make more from the savings and/or investing.

The next decision time would be around what rate you get after the current fix ends. One key decision then would be whether to borrow at lower LTV to try to reduce the mortgage interest cost on the whole amount borrowed. Sometimes that can be far better than saving or investing.

jamesd

INSPIRED wrote: »

Our mortgage interest rate is 3.75%. ISAs, savings accounts, TSB, Santander accounts are all maxed out.

Does anyone agree with me that the 2% charge is worth paying? We have over £7000 to spend.

You only need net 1.75% to beat the 3.75% - 2% that you'd pay on the mortgage and that is easy to get now even with risk-free current and savings accounts. Then you could pay the remainder next year without the 2% penalty. But it'd be crazy to do this given the next part...

INSPIRED wrote: »

We are almost at retirement age and would rather rid ourselves of a mortgage.

This is very puzzling. If you're almost at retirement age you're presumably soon going to be 55 or have already passed that age. This means that from 55 you have immediate access to a 25% tax free lump sum from all personal pension pots and can put money into a pension pot then quickly take it out the 25% lump sum. From 6 April 2015 you can also take out as much of the rest of the pot as you like, added to your normal taxable income. Which means that you can get a quick tax gain by putting money into a pension before using it for any mortgage repaying. You don't even need to invest it anywhere to get this gain, you can leave it sitting on deposit if you want to. Given your apparent age, routing money via a pension is almost unbeatable as a way to go to increase the amount paid off for each Pound of your money spent.

So the most urgent need that comes to mind is to find out about your current pensions and see what those can do to help you to achieve your objectives, adding more money from income or non-pension savings to pension pots along the way to maximise your tax gains.