To Clear or not to clear.....

ConFused.COM

Calling all saving experts out there:
I have been lucky enough (or unlucky depending on how you look) to have inherited just over £100,000 and I now have to make the decision of what to do with it.

I currently have just under £88,000 left on my mortgage, but as I am currently
in the middle of a fixed rate at 5.49% for the next 7 years and it will cost
£2,500 to get out of it. Many believe you should never totally pay off your
mortgage, but my current thinking is that is exactly what I should do now I am
in a position to do so

If I take out another mortgage of, for example £20,000 then I would have to pay
£2,500 to break current mortgage then another hefty chunk of money to start a
new one up, so effectively £3,500 worse off before I get anywhere, although
monthly payments would drop from £559 per month to approx £150.

By paying off the whole Mortgage it would still leave me personal savings of
around £20,000 and I do not have any other debts/credit and although it would be
great to have extra savings in the bank the appeal of being £560 a month better
off and mortgage free seems the sensible way to go.



Any advice you have on this would be greatly appreciated on this

macgirl

I don't have any sound advice so will wait to hear what my learned friends have to say - but it's a nice problem to have
All the best with it!

originalmiscellany

Pay the lot off! A great weight off your mind, and then I would start saving the mortgage money into an account to help long term to either retiring earlier or having better holidays etc. That's what I would do!

Spiggle

If it was me I'd pay it all off, 5.49% is one hell of a rate to be paying for the next 7 years!

I understand the ERC if you pay the whole amount off but do you have any restrictions on the amount you could pay in a lump sum? Just thinking you could maybe pay £85k off and then have minimal monthly payments.

But to be honest, I would say take the ERC hit and get rid. Think of what you could do with £560 per month free gratis and no threat of losing your home. Oh, I'm green with envy!

Good luck with your decision and all the best,
Spigs

dark^knight

If there is no penalty for lump sums, leave a nominal amount in the mortgage, and pay the rest off...keep it ticking over until the fixed rate ends.

freddie1961

Why pay off all your mortgage and have valuable savings stuck in bricks and mortar? As long as the loan repayment is managable (i.e. like a rental payment) keep the savings and enjoy!

gallygirl

Bung the figures into whatsthecost.com and see how much you would save (you'll need to up your monthly payment to 88k to get a comparison :eek:). It will be MUCH more than the 2.5k ERC. I'd be too tight to pay that though and would look for a way round it .

What is the max you can overpay, and leave say 1k balance which you pay off each month? If that option is no good, can you reduce the term of the mortgage? If you could reduce to say 1 year then you could pay 8k a month till it was gone.

Sorry for your loss, but it has left you in a very comfortable position and I'm sure whoever left you it would be glad you're being sensible. Do have a little treat for yourself though

Spiggle

freddie1961 wrote: »

Why pay off all your mortgage and have valuable savings stuck in bricks and mortar? As long as the loan repayment is managable (i.e. like a rental payment) keep the savings and enjoy!

Savings rates are pitiful at the moment and likely to be for some time. For example the best 5 year fix is 4.8% before tax, the best fixed ISA which has a limit of £5,340 per annum pays 4.4% tax free. When you're paying 5.49% in interest on the mortgage savings are, as Martin would say, 'effectively losings'.

If my calculations are correct, and I'm sure somebody will put me right if they're not, £88k at 5.49% is costing the OP around £4,831 per annum in interest. Multiply that by 7 years and that's a grand total of £33,817 paid out (lost) in interest.

While the market in housing goes up and down the likelihood of Confused's property falling by £33k+ in value over 7 years is remote.

And none of the above even starts to consider what could be done in terms of savings with the £560 per month freed up by paying the mortgage off and taking the £2.5k hit on ERC. That could be ploughed into ISA, regular savers (there are quite a few at 8%, 5%, 4.5% gross available) or easy access accounts if that was his/her choice. This equates to real savings rather than the losings scenario if the mortgage was kept on.

Neither does the above consider the £20k cash still available after paying off the mortgage. Which could in effect be used to fill up a 2011-2012 ISA before April and then fill another after April 6. Obviously if a partner is in the picture then an ISA in each name could be more or less filled before and after April.

Sorry freddie1961, yours is a very very short sighted view.

Spigs

Something

Even if nothing else, see what over payments you can make before you are hit with a fee (a number of mortgages allow 10%), fill up your and partners ISA's.

Or buy a small 'Buy to let 'with a large deposit and let someone else pay your reitrement fund.

ConFused.COM

Thanks for all the advice folks - according to my paperwork curently the ERC is £2,634, which is the maxium i would be charged i would be required to pay should i repay the loan or make an overpayment of £500 in any calander month....so I would assume that by that reckoning making a one off payment of all but say £1000 of the mortgage is still going to end in a hefty charge.

The way i look at it the ERC is effectively 5 months mortgage payments.....after that freedom from it all.

Spiggle

Good luck Confused and enjoy your freedom!

All the best,
Spigs