newbie need advice on whether to pay lump sum off mortgage??!

lola2212

Hi, my first post! although i have read loads on these forums!

I am due to come into a large amount of cash in a years time and I'm not sure what to do with it for the best. i will have £28,000 in total. I have debts of £17,000 (terrible I know) along with a mortgage of currently £98,000. I intend to pay off the debts and the rest on the mortgage but after researching have realised that this will not decrease the monthly mortgage payment but just reduce the length of the loan and overall cost (is this correct?) Am i doing the right thing paying the leftover on the mortgage or should I put it in a high rate ISA?

thanks

System

lola2212 wrote: »

Hi, my first post! although i have read loads on these forums!

I am due to come into a large amount of cash in a years time and I'm not sure what to do with it for the best. i will have £28,000 in total. I have debts of £17,000 (terrible I know) along with a mortgage of currently £98,000. I intend to pay off the debts and the rest on the mortgage but after researching have realised that this will not decrease the monthly mortgage payment but just reduce the length of the loan and overall cost (is this correct?) Am i doing the right thing paying the leftover on the mortgage or should I put it in a high rate ISA?

thanks

what is the interest rate on the mortgage?

lola2212

Hi, its 5.5% variable rate x

VoucherMan

What would you like to gain?

Paying off the mortgage earlier and saving a large amount on interest payments, or reducing your monthly payments and not saving as much on the interest?

If it were me I'd make sure I had 6 months or so savings in an ISA as an emergency fund and use the rest on the mortgage.

getmore4less

lola2212 wrote: »

Hi, my first post! although i have read loads on these forums!

I am due to come into a large amount of cash in a years time and I'm not sure what to do with it for the best. i will have £28,000 in total. I have debts of £17,000 (terrible I know) along with a mortgage of currently £98,000. I intend to pay off the debts and the rest on the mortgage but after researching have realised that this will not decrease the monthly mortgage payment but just reduce the length of the loan and overall cost (is this correct?) Am i doing the right thing paying the leftover on the mortgage or should I put it in a high rate ISA?

thanks

Do you have a handle on the debts,

Why they happened?
Had they stopped going up?
Any adverse issues missed payments etc.

What were the monthly payments?

Do you have a SOA.

What are the plans for the money saved each month?

Job security?

Penaties on overpayments?

Emergency funds?

large expences coming up

It is not just a do I pay of the mortgage, it's time for a full financial review.

overpayments don't just have to reduce term.
with a rate of 5.5% it might be time to look at a remortgage whats the houe worth?

Spiggle

Hi and welcome,

Although they may seem daunting the questions asked by getmore4less above are on the ball.

You are lucky in that you have some time before you actually get the cash which gives you time to plan the best way to maximise the value on the money.

You say you have just realised that your OPs would reduce term and not the monthly payment. Has this information come from your mortgage provider? That is really the best place to find out the specifics on what happens with your OPs. And they can tell you if there are any restrictions on OPs with your product. Some are limited to e.g. 10% per annum so you need to find that out direct.

Without doubt you need to clear the debts when you get your cash. You may also need to spend some time working out your budget and perhaps keep a spending diary to identify how the debts got run up. I highly recommend the budget planner tool on the main MSE site for working out if your are spending beyond your means on a regular basis. It will also allow you to work out how much you need to put in savings for a 6 month safety net (in case of redundancy, etc.).

At the rate on your mortgage you are highly unlikely to be able to beat it with savings rates. So any excess left after keeping the safety net is best used paying down your capital outstanding on the mortgage.

Paying off capital can (depending upon the terms and conditions of your specific mortgage) reduce the minimum monthly payment required. If this happens and you can afford to, keeping your standing order/direct debit at the same level means guaranteed OPs every month. It also gives you a better loan to value (LTV) % for if you do remortgage at a later date. (The lower the ltv the better the mortgage rate likely to be available to you). Do you have a current value for your house?

It truly could be that you would be better keeping a smaller level of safety net savings and putting more against the mortgage if paying against the mortgage puts you into a better level of rates for a remortgage. That's why things like your credit history (any arrears, late payments, ccjs, etc.) and your employment status/income level are important in working out your best options for maximising value.

Looking at a best case scenario, a platinum plated credit history and plenty of disposable income with a low ltv could mean that you are able to reduce your outgoings (and the amount of interest paid over the mortgage lifetime) in the long term with a remortgage.

Looking at a worst case scenario, a high number of arrears, late payments and ccjs in the last six years and spending at the limit of income may mean less likelihood of being able to remortgage at better rates in the near future. In which case keeping a six months of outgoings emergency safety net is essential.

Anyway, I didn't mean to go on for so long! I look forward to reading your replies.

Take care,
Spigs

lola2212

]Do you have a handle on the debts, - yes

Why they happened? - an accumulation of living beyond means :-(
Had they stopped going up? - yes and reducing as much as I can all the time
Any adverse issues missed payments etc. - no all payments on time

What were the monthly payments? - do you mean exact amounts i pay monthly?

Do you have a SOA. - is this standing order?

What are the plans for the money saved each month? - to live within my means!

Job security? - yes job security is fine

Penaties on overpayments? - I dont think there are any penalties for overpayments but will double check this

Emergency funds? - dont have any at the moment

large expences coming up - my car is about 11 years old and was thinking I may need a new one next year sometime - so not sure?

It is not just a do I pay of the mortgage, it's time for a full financial review.

overpayments don't just have to reduce term.
with a rate of 5.5% it might be time to look at a remortgage whats the houe worth?

Paid 122,000 for the house, it was valued at 130,000 and I think we would possibly sell it for what we paid for in the current housing market. been declined for balance transfer card twice last few weeks so suspect I wouldnt be in good position to remortgage?!

thanks

lola2212

Spiggle wrote: »

Hi and welcome,

Although they may seem daunting the questions asked by getmore4less above are on the ball.

You are lucky in that you have some time before you actually get the cash which gives you time to plan the best way to maximise the value on the money.

You say you have just realised that your OPs would reduce term and not the monthly payment. Has this information come from your mortgage provider? - no just from researching the net That is really the best place to find out the specifics on what happens with your OPs. And they can tell you if there are any restrictions on OPs with your product. Some are limited to e.g. 10% per annum so you need to find that out direct.

Without doubt you need to clear the debts when you get your cash. You may also need to spend some time working out your budget and perhaps keep a spending diary to identify how the debts got run up. I highly recommend the budget planner tool on the main MSE site for working out if your are spending beyond your means on a regular basis. It will also allow you to work out how much you need to put in savings for a 6 month safety net (in case of redundancy, etc.).

At the rate on your mortgage you are highly unlikely to be able to beat it with savings rates. So any excess left after keeping the safety net is best used paying down your capital outstanding on the mortgage.

Paying off capital can (depending upon the terms and conditions of your specific mortgage) reduce the minimum monthly payment required. If this happens and you can afford to, keeping your standing order/direct debit at the same level means guaranteed OPs every month. It also gives you a better loan to value (LTV) % for if you do remortgage at a later date. (The lower the ltv the better the mortgage rate likely to be available to you). Do you have a current value for your house?

It truly could be that you would be better keeping a smaller level of safety net savings and putting more against the mortgage if paying against the mortgage puts you into a better level of rates for a remortgage. That's why things like your credit history (any arrears, late payments, ccjs, etc.) and your employment status/income level are important in working out your best options for maximising value.

Looking at a best case scenario, a platinum plated credit history and plenty of disposable income with a low ltv could mean that you are able to reduce your outgoings (and the amount of interest paid over the mortgage lifetime) in the long term with a remortgage.

Looking at a worst case scenario, a high number of arrears, late payments and ccjs in the last six years and spending at the limit of income may mean less likelihood of being able to remortgage at better rates in the near future. In which case keeping a six months of outgoings emergency safety net is essential.

Anyway, I didn't mean to go on for so long! I look forward to reading your replies.

Take care,

Thanks! I always make payments on time but found myself declined for 2 credit cards recent (wanted to balance transfer) probably because I have large debts i suspect. I check my credit report regularly and there is nothing bad or missed on there everything is in order.

lola2212

VoucherMan wrote: »

What would you like to gain?

Paying off the mortgage earlier and saving a large amount on interest payments, or reducing your monthly payments and not saving as much on the interest?

If it were me I'd make sure I had 6 months or so savings in an ISA as an emergency fund and use the rest on the mortgage.

I think i would like to put myself in a better position with more disposable income each month so that i do not end up in debt trying to live beyond my means if that makes sense?

m0ns00n

lola2212 wrote: »

Do you have a SOA. - is this standing order?

Hi Lola,

An SOA is a Statement of Affairs. It basically allows you to tally up all your income, outgoings, debts etc in order to help you see where you stand financially, and what cutbacks you can make in order to reduce debt if need be.

http://www.makesenseofcards.com/soacalc.html

Have a look at the Debt Free Wannabe guide for more info about an SOA.

quintwins

I would also recommend doing a SOA as altho living within your means is a good idea, once this money is gone it's gone, you really do need an emergency fund to fall back on, incase that old car goves up, or your boiler breaks, or you get an unexpected bill, you nee dto make a plan for the future.

Also look at the mse overpayments calculator, it's surpised what even a small amount like £100 a month can save you in interest.

If you can afford your mortgage payments at the moment, then reducing your term rather than your monthly payments is a good thing, yes you don't save money right now but you will save more money in interest by knocking a few months (or even years off)