Penalty or Invest

Moving_North

We have sold our house and bought a smaller cheaper place without needing a mortgage. Mixed blessing.
We are tied into fixed rate with Nationwide for another four years...about £45k the outstanding. Unless we transfer the mortgage to our new house we stand to pay £2.5k in penalty. The mortgage is fixed rate about 5.5% from memory.
Is it better just to bit the bullet and pay the penalty or should be continue a mortgage we do not need and invest the surplus £40k in the hope of cancelling out the interest?
Within the next month or two we should have another £150k to invest short term till we find a small rental property to buy.

grumbler

Moving_North wrote:

... about 5.5% from memory...

Welcome.

Make sure that the interest is 5.5%!

If you put £40K to 5%AER saving account you get 4% after tax. You loose £40.000x(5.5%-4%)=£600 per year, hence about £2.4K for 4 years. Difference is small, but actually it will be bigger because:
1. Mortgage balance gets smaller every month and saving balance gets bigger every year.
2. You can find higher interest rate for savings. A&L online saver offers 5.35% (max. balance 25K). Two of you can put up to £6K into tax-free cash ISA every tax year (or up to £14K into maxi ISA).
3. Saving interests are likely to rise while mortgage interest is fixed.

My advice - keep the mortgage until the moment when penalties vanish.

MarkyMarkD

I agree with grumbler, but make sure that you take out the new mortgage on a repayment basis over 5 years (I would say 4, but I expect 5 is the minimum). Then the average balance over the 4 years you are tied in will be closer to £25,000 than £40,000 and the interest loss will be nearer £1,500 than £2,400. Which all means that the penalty is worth saving.

You should have bought the house with the mortgage, though, as you are now going to incur additional legal costs for taking out the unnecessary mortgage after the fact.

Don't Nationwide also allow all their customers to over-pay £500 per month? If you go for the mortgage, you'd obviously want to do that as well to get the balance down as quickly as possible.

Paul_Varjak

Grumbler's calculations assume that you are a Basic Rate taxpayer.

grumbler

1. Paul Varjak is absolutely right about my groundless assumption. It is very important.
2. MarkyMarkD, I do not understand, what ‘new mortgage’ you mean. I think that MovingNorth could have the same problem. I fully agree that monthly overpayments are ‘must do’ if allowed.

MarkyMarkD

Grumbler, if you read the OP, you will note that the original house has been sold and hence the mortgage redeemed.

The new house has been bought for cash.

Therefore there is currently no mortgage.

The OP is asking whether they should port their existing mortgage product to get their redemption penalty returned. Presumably their lender allows a grace period between the two loans - not all lenders do.

isasmurf

NOTE THIS POST IS INCORRECT - PLEASE IGNORE

Moving_North wrote:

Is it better just to bit the bullet and pay the penalty or should be continue a mortgage we do not need and invest the surplus £40k in the hope of cancelling out the interest?

Nobody on this board can give you an answer to this question - if they do they are breaking the law. You will need to see a financial advisor for this question to be answered.

We can highlight the advantages and disadvantages of going either way and make suggestions as to alternatives to consider, but no member of the board is allowed to advise you on the best course of action.

grumbler

isasmurf wrote:

.. but no member of the board is allowed to advise you on the best course of action.

:eek: All this site is about advices! Could you quote the law to make clear for everybody what real restrictions we have. :eek: I think this must be a subject of a separate and serious discussion.

Paul_Varjak

MarkyMarkD wrote:

Grumbler, if you read the OP, you will note that the original house has been sold and hence the mortgage redeemed.

The new house has been bought for cash.

Therefore there is currently no mortgage.

The OP is asking whether they should port their existing mortgage product to get their redemption penalty returned. Presumably their lender allows a grace period between the two loans - not all lenders do.

Having never had a mortgage, or indeed ever having looked at them, I nwas confused by the original post. The way I read it was he still had a mortgage on a house he had sold. That did not make sense to me, so thank you for clearing up my confusion!

Paul_Varjak

isasmurf wrote:

Nobody on this board can give you an answer to this question - if they do they are breaking the law. You will need to see a financial advisor for this question to be answered.

We can highlight the advantages and disadvantages of going either way and make suggestions as to alternatives to consider, but no member of the board is allowed to advise you on the best course of action.

That may be the case for the 'professionals' but I expect many of the 'amateurs' will consider they are giving advice on these forums. Is that against the law too? This is a genuine question that I do not know the answer to!

I do seem to recall one 'professional' on a board on this site say that he could give advice on this site but this would involve paperwork with the regulatory authorities, so it was not worth it! Is that correct?

cheerfulcat

isasmurf wrote:

Nobody on this board can give you an answer to this question - if they do they are breaking the law. You will need to see a financial advisor for this question to be answered.

We can highlight the advantages and disadvantages of going either way and make suggestions as to alternatives to consider, but no member of the board is allowed to advise you on the best course of action.

Isasmurf, that's plain wrong. It is not illegal to give *free* financial advice, on a bulletin board or anywhere else. It is possible that the terms of an IFA's licence don't allow him or her to give advice without a fact find, but that's different.

Cheerfulcat