Lump Sum During Fixed Rate Period

MickeyC

We took a 5 yr fix on a 25 yr capital repayment mortgage with HSBC in March last year. We are able to overpay up to 20% of our monthly payment without incurring any penalties, which we’ve been doing.

We have some savings in fixed-rate deals which we’ll be able to get at in March next year. The rates on these aren’t keeping up with inflation so we’re thinking the best thing might be to pay a lump sum off our mortgage (and keep a bit for emergencies).

We would incur an early repayment charge (ERC) if we did this. The ERC stated in our agreement is “1% of the amount overpaid or repaid early multiplied by the number of years remaining of the fixed or discount rate period, reducing daily”

If we paid in £5000 when we have 4 years of fixed rate to go, I work the ERC out as:

£5000 x 1% / 365 x 1456 days = around £200.

Looking at some online calculators, this could save us £8000 in interest (assuming rates remained the same for 25 years), so £200 to save £8000 seems to make sense, and it also seems to make sense to be reducing our mortgage in case rates do soar.

But:

Am I correct with my calculations?

If we pay in a lump sum, does our rate stay fixed for 4 more years?

If it does, will HSBC then recalculate our monthly payments for the remainder of the fixed period, based on a smaller mortgage?

Is there anything else we should be aware of if we do this?

dimbo61

Why not ring the HSBC mortgage centre and ask them
Will you be able to pay the full 20% overpayment each and every month next year ? and have you paid it this year ?
I would in the current climate keep a large emergency savings pot ! will you have 2 cash ISA,s next april ( you and OH )

DVardysShadow

MickeyC wrote: »

If we paid in £5000 when we have 4 years of fixed rate to go, I work the ERC out as:

£5000 x 1% / 365 x 1456 days = around £200.

Looking at some online calculators, this could save us £8000 in interest (assuming rates remained the same for 25 years), so £200 to save £8000 seems to make sense, and it also seems to make sense to be reducing our mortgage in case rates do soar.

But:

Am I correct with my calculations?

Your arithmetic may be correct, but your reasoning is wrong. In particular, although putting the money in now may save you £8000 over 25 years, it will still save you most of that £8000 if you keep the £5000 where it is until your fix is finished and then use it to reduce your mortgage.

The comparison calculation will be

• how much will you owe on the mortgage at the end of the fix if you pay the money in now [deducting the early repayment charge]
• how much will you owe on the mortgage at the end of the fix if you leave the money where it is to the end of the fix and then pay it off the mortgage

SeriouslySeekingtoSave

You could also try asking if you can change the length of the mortgage for free and back againif required. If a 25 year gets dropped down to 5 years the monthly op's will skyrocket and chomp through those savings. Just make sure you can change it back again when you need to!

MickeyC

Thanks DVardysShadow:

I've done some more sums. Yes, paying off £5000 will save about £8000 over 25 years. BUT it doesn't make much difference if this £5000 is paid off now, or in another 4 years time.

It would make about £900 difference, then take away £200 early repayment fee, and then knock off any interest you would have made on the £5k.

We've decided to keep the money in savings, and look for a reasonable rate in March next year. Then, we'll look again at what we've got at the end of the fixed rate period in April 2016.

(If interest rates go up before April 2016, we'll probably come out better by keeping the money in savings, and for the sake of less than £700 it's probably better to have the savings ready and waiting.)