Mortgage Query

isis_79

Hello,
My husband and I were both made redundant a couple of months ago. We got rather good pay offs, so are looking for advice on what to do with the money?

We have a mortgage of 110,000, and have almost 20k in our savings just now. Would it be sensible to put this on the mortgage? We are aiming to overpay our mortgage each month (even if its just 100 quid a month). Would this be the most sensible course of option? We are determined to have it paid off earlier!!

thanks

RenovationMan

Are you planning on claiming any benefits as you're both unemployed?

isis_79

Sorry, should have clarified that!
I have a new job, started last week. And no, not claiming benefits.

RenovationMan

isis_79 wrote: »

Sorry, should have clarified that!
I have a new job, started last week. And no, not claiming benefits.

Didn't mean to pry but it has an impact on benefits if you make large overpayments onto your mortgage.

In your case the only questions you need to ask yourself is whether you are able to get a better rate on your savings than on your mortgage, whether you are allowed o make overpayments without any penalties and whether you have sufficient retirement provision.

quicklee99

RenovationMan wrote: »

Didn't mean to pry but it has an impact on benefits if you make large overpayments onto your mortgage.

In your case the only questions you need to ask yourself is whether you are able to get a better rate on your savings than on your mortgage, whether you are allowed o make overpayments without any penalties and whether you have sufficient retirement provision.

Knocking £xxx off your mortgage would not only reduce a big capital amount off, but it also reduces the interest you will be paying. Also when it comes to re-mortgaging it will put you in a better LTV ratio meaning access to better rates. So my thoughts would be to pay off a chunk of the mortgage.

It's not quite clear cut as asking if a savings rate is better than your mortgage rate, people always bang on about this.

You say you owe £110k an you have saving of £20k, ok so you stick that in an a good savings account earning 5% so that gets you £1k interest.

However if you knock that £20k off your mortgage you only pay the interest on 90k rather than 110k, so there is potential to save alot more in compound interest. Even if your mortgage rate is 2% thats 2.2k you could saving paying interest.

I'm not saying pay it all off the mortgage just trying to illustrate a point as this "saving rate is better than mortgage rate" concept annoys me :d

Trentenders

quicklee99 wrote: »

Knocking £xxx off your mortgage would not only reduce a big capital amount off, but it also reduces the interest you will be paying. Also when it comes to re-mortgaging it will put you in a better LTV ratio meaning access to better rates. So my thoughts would be to pay off a chunk of the mortgage.

It's not quite clear cut as asking if a savings rate is better than your mortgage rate, people always bang on about this.

You say you owe £110k an you have saving of £20k, ok so you stick that in an a good savings account earning 5% so that gets you £1k interest.

However if you knock that £20k off your mortgage you only pay the interest on 90k rather than 110k, so there is potential to save alot more in compound interest. Even if your mortgage rate is 2% thats 2.2k you could saving paying interest.

I'm not saying pay it all off the mortgage just trying to illustrate a point as this "saving rate is better than mortgage rate" concept annoys me :d

I don't get this point. Surely you get compound interest on your savings also???

Mathematically, if you earn more in savings (after tax has been deducted), then save. If you don't, pay off the mortgage.

One other thing about the above is that you can always improve your LTV with your savings whenever you come to remortgage - you don't need to overpay now for this.

One other thing to take into consideration though is that you may need some of that money for short-term emergencies (boiler/car breakdown, another redundancy, etc.). Can you get the money back out from your mortgage if you need it? If not, it might be sensible to keep easy access savings to keep you going for 3-6 months.

Out of interest, what is your current mortgage rate?

quicklee99

Trentenders wrote: »

I don't get this point. Surely you get compound interest on your savings also???

Mathematically, if you earn more in savings (after tax has been deducted), then save. If you don't, pay off the mortgage.

One other thing about the above is that you can always improve your LTV with your savings whenever you come to remortgage - you don't need to overpay now for this.

One other thing to take into consideration though is that you may need some of that money for short-term emergencies (boiler/car breakdown, another redundancy, etc.). Can you get the money back out from your mortgage if you need it? If not, it might be sensible to keep easy access savings to keep you going for 3-6 months.

Out of interest, what is your current mortgage rate?

Not necessarily.

I wasn't saying they should put all their savings in, of course always keep some back for a rainy day. Do the maths yourselves but with an outstanding balance of £110k I can't see how long term that a savings acc will outweigh the benefit of paying off some capital now while interest rates are so low for both mortgages and savings

RenovationMan

quicklee99 wrote: »

Knocking £xxx off your mortgage would not only reduce a big capital amount off, but it also reduces the interest you will be paying. Also when it comes to re-mortgaging it will put you in a better LTV ratio meaning access to better rates. So my thoughts would be to pay off a chunk of the mortgage.

It's not quite clear cut as asking if a savings rate is better than your mortgage rate, people always bang on about this.

You say you owe £110k an you have saving of £20k, ok so you stick that in an a good savings account earning 5% so that gets you £1k interest.

However if you knock that £20k off your mortgage you only pay the interest on 90k rather than 110k, so there is potential to save alot more in compound interest. Even if your mortgage rate is 2% thats 2.2k you could saving paying interest.

I'm not saying pay it all off the mortgage just trying to illustrate a point as this "saving rate is better than mortgage rate" concept annoys me :d

Dear oh dear. MSE Martin is right, they should teach basic finance in schools.

Trentenders

quicklee99 wrote: »

Not necessarily.

I wasn't saying they should put all their savings in, of course always keep some back for a rainy day. Do the maths yourselves but with an outstanding balance of £110k I can't see how long term that a savings acc will outweigh the benefit of paying off some capital now while interest rates are so low for both mortgages and savings

I'm on an IO mortgage with a 2.5% rate and I've no limit on (over)payments and have no ERC's. My repayment vehicle is filling my ISA each year and then checking savings accounts/bonds, to see if I can get more than 2.5% after tax. This year I'm saving £300 p/m @ 8% (before tax) and have nearly filled my cash ISA allowance @ 3.2%.

If savings rates ever drop below 2.5% then I'll consider paying off a chunk of my mortgage (keeping emergency savings in an ISA).

I'm not sure that I need to check my calculations - I'll definitely pay my mortagage off faster this way.... so long as I'm not tempted to dip into the fund for a new car or two along the way

Sepa74

I think you definitely need to keep some money out for emergencies - 3 - 6 months of expenses is the suggested amount, and also review your pension arrangements now that you have a new job.

Good luck!

quicklee99

RenovationMan wrote: »

Dear oh dear. MSE Martin is right, they should teach basic finance in schools.

I couldn't agree more, especially if all you are considering is APR